National Academies Press: OpenBook

Modernizing Freight Rail Regulation (2015)

Chapter: Appendix A: Responses to Topics (a)-(f) in Statement of Task

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Suggested Citation:"Appendix A: Responses to Topics (a)-(f) in Statement of Task." National Academies of Sciences, Engineering, and Medicine. 2015. Modernizing Freight Rail Regulation. Washington, DC: The National Academies Press. doi: 10.17226/21759.
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Appendix A

RESPONSES TO TOPICS (a)–(f) IN STATEMENT OF TASK


The statement of task directs the committee to address six queries in addition to the four task items stipulated by Congress for this study. This appendix offers a brief response to each query and cites sections of the report in which more supporting information can be found.

(a) Examine rates and service levels by type of shipper and commodity, service lane, shipper size, and shipper type.

Chapter 2 presents trends and patterns in real rates for 2000 to 2013 derived from the Surface Transportation Board’s (STB’s) confidential Carload Waybill Sample (CWS). Rate trends are examined industrywide, for several major commodity categories, and for common and contract carriage. CWS records are not specific to individual shippers, and hence examination of rates by shipper size was not possible. In addition, rates were not examined at the level of specific shipping lanes because regulations prohibit releasing confidential CWS revenue data for specific routings or origin–destination points. The industrywide and commodity-specific rate trends are compared with trends in the productivity-adjusted Railroad Cost Adjustment Factor, an index of input costs per unit of railroad output. Findings on rate trends as they relate to trends in input costs are summarized in Chapters 2 and 5. In Appendix B, a methodology for identifying unusually high common carrier (tariff) rates on the basis of comparisons with rates for similar shipments in more competitive markets, including shipments moved in contract carriage, is developed and demonstrated. The report recommends that such empirically based methods be used to identify rates that can be challenged according to the maximum rate protections and that such methods replace current methods relying on arbitrary cost allocations.

Freight rail service performance cannot be examined in the same quantitative manner as rates. The review of service quality in Chapter 2

Page 221
Suggested Citation:"Appendix A: Responses to Topics (a)-(f) in Statement of Task." National Academies of Sciences, Engineering, and Medicine. 2015. Modernizing Freight Rail Regulation. Washington, DC: The National Academies Press. doi: 10.17226/21759.
×

was largely limited to a survey of recent shipper complaints. Most concerned the inadequacies of railroads in meeting their common carrier service obligation, particularly during periods of tight capacity caused by high demand and episodes of severe weather. Data at the shipment-specific level are not available for assessing whether shippers using common carriage regularly receive service inferior to that of shippers using contract carriage or whether common carrier service levels are more likely to suffer when capacity is tight. The recommendation that STB begin collecting shipment-specific data to monitor rail service performance on a more regular, detailed, and systematic basis appears in Chapter 5.

(b) Estimate whether railroad exercise of market power has increased since deregulation and the impact this has had on rates and/or service.

As explained in the report at various points, including Chapter 1, the Staggers Rail Act’s legalization of private contracting, pricing freedoms, and effective elimination of open routing have all contributed to the ability of railroads to obtain and exercise market power. Railroads must be able to charge rates that exceed marginal costs, and thus to exercise market power, for at least some portions of their traffic if they are to recoup their large overhead, or common, costs. Whether the scope and intensity of local market power exercised by railroads has been growing in recent years, or whether it has grown beyond the point needed for railroads to pay for their common costs (i.e., to continue to attract capital), cannot be established from examinations of the revenue-to-variable-cost formula that is used by STB for such purposes. As explained in Chapter 3, the revenue-to-variable-cost formula is based on a faulty premise. A railroad’s common costs cannot be divided and allocated to individual segments of traffic in an economically valid way, as is assumed by the formula, or with results that offer insight into the pricing of traffic and a railroad’s exercise of market power. For reasons given in Chapter 4, STB’s annual pass/fail determinations of railroad’s revenue adequacy on a firmwide basis provide little insight into whether railroads have been earning above-normal profits that suggest an ability to exploit market power.

Page 222
Suggested Citation:"Appendix A: Responses to Topics (a)-(f) in Statement of Task." National Academies of Sciences, Engineering, and Medicine. 2015. Modernizing Freight Rail Regulation. Washington, DC: The National Academies Press. doi: 10.17226/21759.
×

The examination of rate trends in Chapter 2 shows that rates have grown faster than input costs since the early 2000s. This divergence could partly be the result of increased exercise of market power. However, the committee is unaware of any structural change in the industry that would have produced a significant increase in market power after 2000. For example, there were no major mergers, nor was there any apparent diminution of competition from trucks or barges. The divergence may also result from the use of congestion pricing by the railroads to manage traffic under capacity constraints. As explained in Chapter 2, congestion may continue in some locations even if a railroad makes all economically justified capacity investments. The cost of capacity expansion to relieve the congestion may exceed the marginal revenue that the railroad derives from congestion reduction. Alternatively, the divergence in rates and input costs may simply reflect a change in the mix of traffic, including more high-margin traffic. The committee did not attempt to distinguish between alternative explanations of recent rate trends relative to trends in input costs.

(c) Describe the potential role that freight rail can serve in shifting some future growth in highway freight shipments to rail.

Chapter 2 references studies of future freight capacity needs by the American Association of State Highway and Transportation Officials, the National Surface Transportation Policy and Revenue Study Commission, and the Association of American Railroads. Each study concluded that increasing the railroads’ share of freight transportation could confer public benefits, including reductions in highway congestion and emissions, through the diversion of freight from trucks. Existing government programs designed to make freight rail more attractive to shippers who would otherwise use highways and to make such freight more profitable for railroads to move are cited in the chapter. Some of the programs have lowered the cost of capital for investment by railroads in the capacity to handle more truck-competitive freight. However, the existence of alternatives for achieving these outcomes, including higher road use pricing and pollution charges, is noted in the chapter. This study did not examine the alternatives or whether the current approach is justified. Such an examination would have required

Page 223
Suggested Citation:"Appendix A: Responses to Topics (a)-(f) in Statement of Task." National Academies of Sciences, Engineering, and Medicine. 2015. Modernizing Freight Rail Regulation. Washington, DC: The National Academies Press. doi: 10.17226/21759.
×

a review of the comparative costs and externalities created by both modes as well as competing modes such as barge, which would have been beyond this study’s scope.

(d) Comment on the role freight rail can serve in meeting the Department of Transportation’s strategic goals.

According to the strategic plan of the U.S. Department of Transportation (2014, 13), the department’s strategic goals are safety (reduce transportation-related casualties), state of good repair (ensure maintenance of infrastructure in good repair), economic competitiveness (promote policies and investments that bring economic benefits), quality of life in communities (coordinate transportation policy with housing and development policy), and environmental sustainability (reduce harmful emissions and oil dependence). This study could not possibly examine the rail freight sector with such broad goals in mind. The report examines the economic regulation of freight railroads. It offers recommendations for federal actions that, if implemented, will maintain the economic efficiency and financial health of the freight rail system while providing more effectively for fair treatment of shippers. Such outcomes would be consistent with strategic goals such as economic competitiveness and maintenance of good repair. The committee did not evaluate the safety, environmental, or other community impacts of its recommendations. It believes that maintaining an efficient and financially sound rail system would be consistent with these strategic goals.

(e) Assess whether Class I freight railroads are earning their cost of capital.

As the report describes in Chapters 1 and 2, the freight railroads have access to credit markets, as is demonstrated by their substantial investments in capacity. This observation alone strongly suggests that railroads are earning their cost of capital. As noted above (and for reasons explained in Chapter 4), the committee finds that STB’s annual appraisal of the revenue adequacy of each Class I railroad does not provide meaningful information about the industry’s earnings or profitability levels. Consideration of the railroad industry’s profitability levels over the extended period of a business cycle and comparisons with

Page 224
Suggested Citation:"Appendix A: Responses to Topics (a)-(f) in Statement of Task." National Academies of Sciences, Engineering, and Medicine. 2015. Modernizing Freight Rail Regulation. Washington, DC: The National Academies Press. doi: 10.17226/21759.
×

the ranges of profitability observed in other industries would be more relevant. Therefore, the report recommends that the statutory requirement for an annual revenue adequacy determination be repealed and replaced with a requirement for periodic (e.g., 5- to 10-year) assessments of industrywide economic performance, competitive conditions, and rate and service levels. The committee is also mindful of the fact that revenue adequacy calculations in other regulated industries have often been made within the context of rate-of-return regulation. This form of regulation has never been used in the U.S. railroad industry and has had a mixed record when it has been used, as noted in Chapter 3.

(f) Assess whether railroads continue to be a decreasing cost industry due to economies of density or whether average and marginal costs are rising and the implications the latter has for STB oversight and regulation.

This report does not examine whether the railroads have exhausted or nearly exhausted all economies of density, and by implication, whether railroads should continue to be allowed to engage in differential pricing. Given the complexity of network economics and the dominance of common costs in railroad operations, the committee recognized the difficulty of undertaking such assessments and did not attempt to do so. A characteristic of operating near capacity is that the marginal cost (including congestion elements) will rise with traffic levels. While the assumption that marginal costs are rising with traffic levels for well-defined movements is logical, the committee is unaware of any studies that have attempted to answer this question more generally. The fundamental economics of railroad networks have not changed. Even if marginal costs are now rising, they can be expected to decline again with increases in output when capacity is expanded.

REFERENCE

U.S. Department of Transportation. 2014. Transportation for a New Generation: Strategic Plan, Fiscal Years 2014–2018.

Page 220
Suggested Citation:"Appendix A: Responses to Topics (a)-(f) in Statement of Task." National Academies of Sciences, Engineering, and Medicine. 2015. Modernizing Freight Rail Regulation. Washington, DC: The National Academies Press. doi: 10.17226/21759.
×
Page 220
Page 221
Suggested Citation:"Appendix A: Responses to Topics (a)-(f) in Statement of Task." National Academies of Sciences, Engineering, and Medicine. 2015. Modernizing Freight Rail Regulation. Washington, DC: The National Academies Press. doi: 10.17226/21759.
×
Page 221
Page 222
Suggested Citation:"Appendix A: Responses to Topics (a)-(f) in Statement of Task." National Academies of Sciences, Engineering, and Medicine. 2015. Modernizing Freight Rail Regulation. Washington, DC: The National Academies Press. doi: 10.17226/21759.
×
Page 222
Page 223
Suggested Citation:"Appendix A: Responses to Topics (a)-(f) in Statement of Task." National Academies of Sciences, Engineering, and Medicine. 2015. Modernizing Freight Rail Regulation. Washington, DC: The National Academies Press. doi: 10.17226/21759.
×
Page 223
Page 224
Suggested Citation:"Appendix A: Responses to Topics (a)-(f) in Statement of Task." National Academies of Sciences, Engineering, and Medicine. 2015. Modernizing Freight Rail Regulation. Washington, DC: The National Academies Press. doi: 10.17226/21759.
×
Page 224
Next: Appendix B: Demonstration of Competitive Rate Benchmarking to Identify Unusually High Rates »
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TRB Special Report 318: Modernizing Freight Rail Regulation examines the future role of the Surface Transportation Board (STB) in overseeing and regulating the service levels and rate offerings of railroads, particularly as they become revenue adequate. The approaches recommended in this congressionally-requested report are intended to resynchronize a regulatory program that has become outdated.

The study committee finds that while the U.S. freight railroad industry has become modernized and financially stable since the Staggers Rail Act of 1980, some of the industry’s remaining economic regulations have not kept pace and should be replaced with practices better-suited for today’s modern freight rail system.

Specifically, the study committee finds that more appropriate, reliable, and usable procedures are needed for resolving rate disputes. It recommends that Congress prepare for the repeal of the current formula for screening rates for eligibility for rate relief, and direct the U.S. Department of Transportation to develop a more reliable screening tool that compares disputed rates to those charged in competitive rail markets. This tool would replace current methods that make artificial and arbitrary estimates of the cost of rail shipping.

Current adjudication methods can cost millions of dollars for litigation and some have taken years to resolve, deterring shippers with smaller claims from seeking rate relief. Simplified methods that are economically valid and practical to use have yet to be introduced. The study committee recommends that STB hearings used to rule on the reasonableness of challenged rates be replaced with arbitration hearings that compel faster, more economical resolutions of rate cases. It also recommends that arbitrators be empowered to use reciprocal switching as a remedy for those rates found to be unreasonable.

The study committee recommends the transfer of merger review authority to antitrust agencies. It also recommends that STB give priority to the data needed to oversee the railroads’ response to their common carrier service obligation by collecting and analyzing shipment-level data on service quality.

Press Release

Two page summary of the report

Recording of Surface Transportation Board Roundtable Discussion, October 25, 2016:

Recording of Richard Schalensee's Testimony at Surface Transportation Board Hearing, June 10, 2016:

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