September/October 2006
Shippers Are Not Sold on Rail Car Auctions
Scrapyards continue to face a chronic shortage of gondolas for transporting scrap. To manage the limited supply, some railroads have turned to rail car auctions. Many shippers denounce this approach, calling it simply a way for railroads to increase their revenue by charging more for the existing supply—and a disincentive for railroads to purchase more cars. Though auctions seem to be here to stay, shippers have some recourse to ensure that railroads using them continue to meet their common-carrier obligations.
The Railroad Regulators
The Surface Transportation Board, the successor agency to the Interstate Commerce Commission, regulates the railroad industry. Despite substantial deregulation over the past 25 years, shippers still have some regulatory protection.
As common carriers, railroads must provide service upon reasonable request. That service includes a duty to provide a reasonable supply of rail cars. What’s reasonable? The law specifies two responsibilities: First, a railroad must maintain a fleet of cars sufficient to meet average—but not peak—demand. Thus, car shortages during periods of higher-than-usual demand are allowed. Second, in times of car shortage, railroads must distribute cars fairly and equitably. Some shippers question whether car auctions meet that requirement.
The courts have determined that rail car auctions are not in themselves unreasonable, but railroads using them must meet certain standards. If a railroad elects to allocate a portion of its rail fleet via auctions, the remainder of its fleet must be sufficient to satisfy its common-carrier obligations to those shippers who choose not to participate in the auction.
Legal Challenges
Rail car auctions have faced only one regulatory challenge in 25 years: In 1992, the National Grain and Feed Association (Washington, D.C.) contested Burlington Northern’s Certificates of Transportation (COTs) program for some grain transportation. The ICC upheld the program based on the following features:
• BN guaranteed cars to the winning bidder;
• BN paid a penalty for not delivering service;
• the successful bidder paid only a 25-percent down payment;
• the winning bidder could resell its certificates to other shippers; and
• BN limited its auction to 40 percent of its grain fleet.
Though the STB won’t necessarily require other rail car auctions to meet those five requirements, it’s instructive to know which factors the agency considered in its decision.
NGFA appealed the ICC’s decision and obtained a partial reversal. The court concluded that the ICC failed to consider BN’s ability to meet its common-carrier obligation to shippers who chose not to participate in the COTs program. The court remanded the case back to the ICC for consideration of that question. Because the case ultimately settled, however, the ICC never explained how it would evaluate that issue.
Auction Pros and Cons
Rail car auctions have some value as a temporary measure when they’re part of a broader solution to the underlying car shortage. Because of the time lag between when railroads order new cars and when they receive them, they need some means of distributing the current supply. Arguably, car auctions distribute cars to where they are most needed—or at least to where they are most valued.
Furthermore, in times of shortage, shippers commonly order more cars than they need in the hope of getting what they truly require. This tends to exacerbate the shortage, however, and it’s potentially wasteful. Car auctions can discourage this over-ordering.
Car auctions also could provide funds for the purchase of new cars. If railroads would dedicate auction proceeds to new car investments, shippers would be less concerned that railroads are using auctions as a profit center. And because the auction value of the fleet will approach zero as the supply of rail cars approaches demand, the auction process can be self-regulating.
The greatest objections to car auctions arise from perceptions of unfairness. Auctions appear to be a way for railroads to increase their revenue without investing in greater capacity. Often there’s no penalty for railroads that fail to deliver cars, but there is a penalty for winning bidders who fail to use the cars. Further, many shippers feel it’s just unfair for a common carrier to partially allocate cars to the highest bidder.
Railroads that implement rail car auctions still must meet their common-carrier obligations. Shippers that believe a railroad is ignoring those obligations can file a complaint with the STB. But until someone files a complaint, there’s nothing the STB can do.
Jeffrey Moreno is a partner and Laurence Prange is an associate in the transportation group of Thompson Hine LLP in Washington, D.C. Reach Moreno at 202/263-4107or jeff.moreno@thompsonhine.com and Prange at 202/263-4121 or laurence.prange@thompsonhine.com.
Scrapyards continue to face a chronic shortage of gondolas for transporting scrap. To manage the limited supply, some railroads have turned to rail car auctions. Many shippers denounce this approach, calling it simply a way for railroads to increase their revenue by charging more for the existing supply—and a disincentive for railroads to purchase more cars. Though auctions seem to be here to stay, shippers have some recourse to ensure that railroads using them continue to meet their common-carrier obligations.