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Collusive Behavior

BY Frank N. Wilner
by Frank N. Wilner on 3/26/01.

Captive shippers frustrated with railroad market power should consider filing antitrust suits that could net them triple the amount of their proven damages, said Glenn Scammel, Republican chief counsel to the House Railroad Subcommittee. But shipper attorneys said the evidentiary burden could be too difficult and that declaring the equivalent of nuclear war against a sole supplier may not be a wise tactic.

Meanwhile, free-market economist Jerry Ellig, a senior research fellow at George Mason University, said railroads are incorrect to term some captive-shipper legislative initiatives, such as streamlining regulatory rate complaint procedures, as reregulation. Some post-deregulation legislation actually "enhances competition," said Ellig. Scammel and Ellig were panelists at a public policy forum last week on Capitol Hill sponsored by Citizens for a
Sound Economy, which advocates limited government involvement in the private sector.

Reregulaton is about "turning back the clock and reversing" course, said Ellig. Simply passing new laws may be additional regulation but isn't always "counter to the spirit of deregulation." Thus requiring one privately owned railroad to grant access to another would be reregulation, but restricting monopoly profits or simplifying the procedure by which a captive shipper challenges the reasonableness of a rate could enhance competition, he said.

Scammel said a public policy challenge exists when some shippers without effective alternatives to rail pay "high rates for poor service." But if railroads cannot differentially price and realize higher margins from captive shippers, then there will be insufficient revenue to renew facilities that are essential to captive shippers. "How we solve that problem without trashing the railroads' revenue flow is the dilemma," he said.

One solution would be for railroads to change their culture, become more reliable and reap "additional billions" from new business, said Scammel. But it doesn't necessarily mean railroads would voluntarily reduce rates to captive shippers.

For small shippers the solution lies in less expensive and more user-friendly procedures established by the Surface Transportation Board, said Scammel. Small shippers counter that previous attempts by regulators to simplify the system failed, that they have no trust in the STB and that the only effective solution is a legislative remedy that might include a single benchmark test or binding arbitration.

Most large shippers, said Scammel, can afford the $1 million cost of bringing rate complaints before the STB. Moreover, three of four stand-alone rate cases brought by shippers have been decided in favor of shippers, he said, and substantial reparations were ordered. However, where shippers feel frustrated because rate relief is not available through the STB, they should consider the alternative of bringing an antitrust action, he said. That could be a means of solving the so-called bottleneck problem where two railroads serve an origin but only one serves the destination.

It is alleged that the bottleneck railroad manipulates the price over the monopoly segment to discourage a joint haul. The STB permits a rate complaint only if the shipper first obtains a contract from the second railroad to the interchange point of the bottleneck. Shippers want Congress to permit a challenge to the bottleneck rate without their first obtaining the contract because, say shippers, railroads generally refuse to write such contracts. That, said Scammel, could mean collusion not to compete, which is an antitrust violation punishable by treble damages.

Shipper attorney Martin Bercovici said proving such collusion is "more daunting" than any rate case, diverts shipper executives from their normal tasks for lengthy periods and poisons shipper relationships with their sole supplier more than other legal procedures. In fact, railroads occasionally have offered shippers contracts on the competitive segments of some routes permitting shippers to challenge the bottleneck portion of the rate - a fact shippers would use to defend against allegations of collusion.

Additionally, railroads are insulated by law from many antitrust challenges, meaning narrow exceptions must be carved out. Also, railroads would have a high probability of having the case sent to the STB anyway because, said shipper attorneys, courts likely would first want to know from an expert body whether the rates in question are unreasonable.