Biden to Target Railroads, Ocean Shipping in Executive Order

Date: Thursday, July 8th, 2021
Source: The Wall Street Journal

WASHINGTON—The Biden administration will push regulators to confront consolidation and perceived anticompetitive pricing in the ocean shipping and railroad industries as part of a broad effort to blunt the power of big business to dominate industries, according to a person familiar with the situation.

As part of a sweeping executive order expected this week, the administration will ask the Federal Maritime Commission and the Surface Transportation Board to combat what it calls a pattern of consolidation and aggressive pricing that has made it onerously expensive for American companies to transport goods to market.

The administration says the relatively small number of major players in the ocean shipping trade and in the U.S. freight rail business has enabled companies to charge unreasonable fees.

In the case of the seven Class 1 freight railroads, consolidation has given railroads monopoly power over sections of the country where theirs are the only freight tracks, the person said.

The executive order will encourage the STB to take up a longstanding proposed rule on so-called reciprocal or competitive switching, the practice whereby shippers served by a single railroad can request bids from a nearby competing railroad if service is available.

The competitor railroad would pay access fees to the monopoly railroad, but could win the shipper’s business by offering a lower price, using the rival railroad’s tracks and property.

The STB proposed a competitive switching rule in 2016 but hasn’t yet acted on it.

“The consolidation brought about much-needed rationalization in the system 25 years ago, but the net result is a lot of shippers who are subject to a market-dominant railroad,” said a government official briefed on the White House’s proposal for the STB.

But a move to mandate switching would guarantee a battle with the freights and the railroad trade association, the Association of American Railroads, which has long opposed the policy.

“Competition remains fierce across freight providers, and any proposal mandating forced switching would put railroads—an environmentally friendly option that invests $25 billion annually in infrastructure—at an untold disadvantage,” Ian Jefferies, chief executive of the railroad association, said Thursday. “Such a rule would roll back the foundational market-driven principle that keeps the industry viable, reduce network fluidity, and ultimately undermine railroads’ ability to serve customers at a time when freight demands have dramatically increased.”

The call to crack down on ocean carriers and freights is one facet in a multipronged executive order that will be one of Mr. Biden’s most sweeping unilateral moves on economic policy to date.

The Democratic president, who has stacked his administration with a cohort of advisers skeptical of corporate power and market dominance, is trying to blunt big business while introducing more competition in areas across the economy.

The result, the administration contends, will be more leverage for smaller companies and individual workers, and less ability for a few huge companies to dictate terms for the economy at large.

Among other things, the executive order will call on the Federal Trade Commission to adopt rules that curtail noncompete agreements. The White House said roughly half of U.S. private-sector businesses use noncompete agreements, affecting an estimated 30 million people.

“He believes that if someone offers you a better job, you should be able to take it,” White House press secretary Jen Psaki said Wednesday.

The executive order will also call on the FTC to ban unnecessary occupational licensing requirements.

“While occupational licensing can serve important health and safety concerns, unnecessary or overly burdensome licensing can lock people out of jobs,” Ms. Psaki said, adding that the White House estimates about 30% of jobs in the U.S. require a license.

Ms. Psaki has previously said the executive order would direct the Agriculture Department to issue new rules aimed at boosting the farm economy and lifting individual farmers’ incomes, and at thwarting what she called “abuses of power by giant agribusiness corporations.”

The actions would include measures to bar meat raised and slaughtered abroad from bearing “Product of the U.S.A.” labels, giving farmers the right to “repair their own equipment how they like,” and preventing chicken processors from underpaying their suppliers, Ms. Psaki said.

In its actions targeting the transportation sector, the administration is highlighting what it calls the dangers of consolidation. Three alliances control 80% of the shipping market, the person familiar with the executive order said.

In 2000, this person said, the 10 largest shipping companies controlled just 12% of the oceangoing freight business.

The White House says that dominance has come at a cost for American exporters, allowing the companies to extract higher rates. For U.S. importers, the consolidation has given carriers leverage to raise fees like those for demurrage, essentially late fees on shipments that aren’t picked up from freight terminals on time.

The order will ask the maritime commission to crack down on such fees, and to take all other steps to protect American exporters from high fees. The order also asks the commission to work with the Justice Department to enforce its actions. The commission and the Justice Department are expected to sign a new memorandum of understanding to improve their cooperation on such investigations soon, the person said.

Maritime Commission Chairman Dan Maffei has said recently that the commission’s ability to address issues like container shortages and surging rates may be limited if the cause is the surge in demand as the global economy rebounds from the coronavirus pandemic. The commission is limited in its options unless it finds evidence of intentional manipulation of prices, he has said.

A wave of combinations in the 1990s left the U.S. with just seven Class 1 freight railroads, though STB merger rules in place since the administration of President George W. Bush have effectively prevented further consolidation. Still, the White House argues that the current state of the industry leaves railroads with effective duopolies in much of the country, and monopolies at the local level, meaning customers have little leverage to negotiate prices.

The White House will also encourage the STB to consider proposals that would compel railroads to offer rates that would better enable shippers to cobble together routes across competing rail networks to lower their costs, and to more readily bring cases to the STB to challenge railroads’ rates, this person said.

The overture to the STB comes as the regulator faces one of its busiest workloads in years. The board has been asked by Amtrak to mediate a dispute over restarting passenger service along the Gulf Coast, something freight railroads and commercial shippers have warned could disrupt service.

The board is also considering the first major consolidation in years: a hard-fought contest between Canadian Pacific and Canadian National to take over Kansas City Southern, the smallest of the Class 1 freights, to cobble together a network linking Canada, the U.S. and Mexico.

Kansas City Southern’s board has accepted a roughly $30 billion topping bid from Canadian National. The companies are now awaiting a ruling from the STB on Canadian National’s application to set up a voting trust to control KSC, as they await the outcome of STB’s broader review of the deal on anticompetitive grounds.

 

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