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Letter to Secretary LaHood and Assistant Attorney General Varney

Letter

By:
Date:
Location: Washington, DC

Dear Secretary LaHood and Assistant Attorney General Varney:

I am writing to ask both of your agencies to support the Railroad Antitrust Enforcement Act (S. 49), legislation that I believe is critical to strengthening American businesses and protecting consumers. This legislation passed the Senate Judiciary Committee by a bipartisan 14-1 vote in March.

The many businesses that rely on railroads to ship their goods, including agricultural, electric and manufacturing companies, are critical to rebuilding our economy. But today, they are hindered by the freight railroad industry's anticompetitive and monopolistic practices that go unchecked because of their immunity under the antitrust laws. This increases costs for shippers and forces them to pass the costs on to consumers. Consumers face higher electricity bills because a utility must pay for the high cost of transporting coal and higher prices for goods produced by manufacturers who rely on railroads to transport raw materials. They also result in reduced earnings for American farmers who ship their products by rail and raise food prices paid by consumers. Therefore, we must ensure that freight railroads are subject to the basic principles of fair competition by repealing their obsolete and undeserved exemption from the antitrust laws.

The freight railroad industry, largely deregulated by the Staggers Rail Act in 1980, is the only transportation industry that enjoys broad exemptions from antitrust law -- immunity virtually unknown in any other sector of the economy. These exemptions harm rail shippers by denying them remedies for anti-competitive and monopolistic railroad conduct. They also prevent the antitrust enforcers at the Justice Department from taking any action to arrest the alarming wave of consolidation that has swept the industry in recent years.

Our legislation will repeal the antitrust exemption protecting railroads from antitrust scrutiny. If this legislation is enacted, the Justice Department will able to review mergers and acquisitions under the Clayton Act and take action to block those it believes to be anti-competitive;
shippers who are victims of anti-competitive conduct by dominant railroads will be able to file private antitrust actions in federal court for treble damages and injunctive relief; and state attorneys general will be able to pursue antitrust remedies against rail carriers they believe are violating antitrust law. These remedies are acutely necessary because the industry has consolidated from more than 40 class I freight railroads 30 years ago to only four which control 90 percent of the market share, as measured by revenue.

A recent staff report (issued September 15, 2010) of the Senate Committee on Commerce, Science, and Transportation makes clear how railroads have benefited from the unique combination of deregulation and large-scale antitrust immunity, to the detriment of rail shippers and consumers. This Report -- titled "The Current State of the Class I Freight Rail Industry", (hereinafter Commerce Committee Report) -- stated that "[t]he four Class I railroads that today dominate the U.S. rail shipping market are achieving returns on revenue and operating ratios that rank them among the most profitable businesses in the U.S. economy." Commerce Committee Report at 1. The four largest railroads nearly doubled their collective profit margins in the last decade to 13%, ranking the railroad industry the fifth most profitable industry as ranking by Fortune magazine. Id. at 4-5. Increased concentration and lack of antitrust scrutiny have had clear price effects -- according to the Commerce Committee Report, since 2004, "Class I railroads have been raising prices by an average of 5% a year above inflation." Id. at 8. The Commerce Committee Report concluded that "Class I freight railroads have regained the pricing power they lacked in the 1980s, and are now some of the most highly profitable businesses in the U.S. economy." Id. at 8. Unfortunately, this profit comes at the expense of consumers who pay higher prices for food, electricity and manufactured goods. Thus, the case for full fledged application of the antitrust laws is plain.

Further, as the Antitrust Modernization Commission (AMC) found in its April 2007 Report, antitrust exemptions are disfavored and should not be allowed where there is a compelling case in support of the exemption. In the words of the Commission,

[s]tatutory immunities from the antitrust laws should be disfavored. They should be granted rarely, and only where, and for so long as, a clear case has been made that the conduct in question would subject the actors to antitrust liability and is necessary to satisfy a specific societal goal that trumps the benefit of a free market to consumers and the U.S. economy in general.

AMC Report at 350. No such case has been made for the railroad antitrust exemption. Moreover, the railroad industry's immunity from merger review at the antitrust enforcement agencies is also contrary to sound public policy. As the AMC found, "[e]ven in industries subject to economic regulation, the antitrust agencies generally should have full merger enforcement authority under the Clayton Act." Id. at 364.

I am pleased that the Surface Transportation Board has launched an inquiry into competition in the railroad industry, including holding hearings on this topic last month, and is examining further steps it can take to enhance competition. Whatever reforms the STB undertakes, it remains essential that the outmoded antitrust exemption be repealed. Therefore, I intend to continue to press for passage of the Railroad Antitrust Enforcement Act in the 112th Congress. As we work together to shore up our economy, grow our small business, and put more money in consumers' pockets, I ask that your agencies make rail antitrust reform an essential element of our rail transportation policy and support a repeal of this unwarranted antitrust exemption.

Thank you for your attention to this matter.

Sincerely,


HERB KOHL
Chairman, Subcommittee on Antitrust,
Competition Policy, and Consumer Rights


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