Greetings from a day of listening to the proceedings from the Star Chamber, I mean, the STB (Reciprocal Switching/Forced Access);
No one expects the Spanish Inquisition! OK, it wasn’t quite that, but this got nastier than I expected….and it is clear that the positions and biases on all sides were brought into today's STB Zoom Hearings and left unchanged if some feathers were ruffled. The tenor was more of a court of law (“are you an expert in operations?”) rather than a “Hearing” or fact/finding mission; the hostility was ramped up by the end of the very long day (see the rude treatment afforded to Harvard Professor Mark Fagan, speaking on behalf of the AAR).
The day can be summed up by the Q&A at the end of the Union Pacific Panel, as their team (including COO, CMO, and CFO) were dressed down by Chairman Marty Oberman like naughty high school students going to detention. The Chairman brought up a filing by UP customer Dow, which like Proust’s madeleines brought memories flooding back to me….
First, the example by Oberman – Dow states that two plants at Plaquemines LA, unable to be switched at NOLA by the UP, are routed eastward via East St Louis on the UP – causing 335,000 extra route-miles in 2021 alone, plus wear and tear on the cars (I would assume, though left unsaid, on the track, too) and all of the emissions (later the Chairman stated as fact that “Railroads are oblivious to the climate crisis”!). Note that this is not a reciprocal switch issue, but anyway….Oberman asked the UP team: “Can you think of any context where adding route miles is in the public interest”?
CMO Kenny Rocker tried to answer that in some cases it could be to a better interchange point or actually be faster…he was interrupted by the Chairman, who asked rhetorically: “Do you think that Dow would be (saying this in a filing) if the route was faster? You don’t need to answer that.” But I will! Which brings me to my memory:
Sitting live in an earlier (early “aughts”) STB hearing in DC, next to the late (great) UP CEO Jim Young we all heard….Dow Chemical get up and say on the record that railroad pricing (alone) was causing his company to build plants offshore (Kuwait “costing American jobs”)….unsaid was the overwhelming factor of feedstock prices which made the Middle East such an attractive option at the turn of the century until the US “Shale Revolution” slashed US feedstock prices and Dow pivoted from Kuwait back to the US Gulf. Young was quietly seething at the, well, public lying by a top customer (who had, ironically, given UP a carrier award the very day before).
So, yeah, I do think Dow would put things in the record to serve their self-interest and try to fool an unsophisticated Board. And then UP’s lawyer raised a great point for rail switching decisions – density! Rails thrive on it. Rails are a complex network business and the STB is viewing them as a simple point-to-point business (“Why not just go to NOLA?” in a vacuum). That actually correct answer didn’t convince the Chairman who asked if perhaps UP (and in this case CSX) should divert their cash from buybacks (!!) to grow the necessary capacity to interchange at NOLA (is the land available? Do rails currently underspend?). He concluded, “How can you justify moving cars that way simply to make money?” And there it is*.
Some other tidbits:
- In response to the Board asking about why they should consider trucks as an alternative given that we all want to take trucks off the highway (“Are you forcing business to trucks”, BNSF responded that – no, of course, they want to take business off the highway (see the BNSF Intermodal, position of; history of; etc) but that in considering competition “Are trucks relevant? YES.” This, I fear went unheard….
- CP was very good, urging caution and (after hearing the snark “You have had R/S for 100 years in Canada and aren’t you both doing well?”) noting that the 100+-year-old Canadian application of Reciprocal Switching should not be the model for what would happen in the US. There are some 355K “structural switched” between CN and CP a year, but only one regulated one in the last ten years….and that although it works, the Canadian rail network is “very fragile”
- Many rails mentioned the obvious arguments that such changes add cost, complexity (in a complex supply chain period), handling (thus errors), safety risk (switching being more dangerous), and could reduce (ROIC and therefore) Capex and add to inflation
- Commissioner Primus expressed that he was “very disappointed”; shippers were complaining about service, the rails are talking (the Talk) about customer-centricity but where is it? Oberman asked why the STB had to get in between customers and shippers (why indeed?). Primus – “We (the STB) are the last line” for customers….but as argued by UP’s CFO, is this proposal the solution, or is it adding cost and complexity?
- There was a call by railroads that this would hinder the flow of information and transparency, making long and short-term planning difficult. This may be true – but I kept hearing “Rail Pulse” in the wind…
- The AAR’s expert Michael Baranowski of FTI was impressive – fact-based analysis of ~1500 locations that would qualify under the proposed rules….he noted that of the new “stations” added to the rail network, 81% were voluntarily single served (one example, the PA-based Shell plastics plant on the CSX). The afore-mentioned Professor Fagan mentioned the Australian example, of which I am familiar, noting the “wealth transfer” from carrier/network to the shipper (mining companies) without any discernable increase in efficiency, etc.
- Commissioner Hedlund got the last word – we’re here “because of a failure in the supply chain caused by poor service by the railroads”. Presumably by the railroads on their own, I am guessing,
- Day One Summary – this was worse than I thought – I had earlier characterized the AAR’s Ian Jefferies as Will Kane, or Shane, or even Churchill. Through no fault of his own, I might have mischaracterized the plot here – instead of “High Noon” may we be looking at Don Quixote?
*OK, I can handle this – how about “Because they are public companies? As are there customers, who also make decisions based on the profit motive…” Or “Because they need a return (ROIC) to justify their enormous CAPEX required to be in the business?” Or “Because they know best how to run their network?” Or….
Anthony B. Hatch
abh consulting
http://www.abhatchconsulting.com
abh18@mindspring.com
Twitter @ABHatch18