Modernizing Freight Rail Regulation (2015) / Chapter Skim
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1 STUDY BACKGROUND, CHARGE, AND APPROACH
1 STUDY BACKGROUND, CHARGE, AND APPROACH
Pages 12-50
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From page 12... ...
Regulators also retained responsibilities for general oversight of the industry's financial performance and competitive structure, especially with regard to interactions among railroads. When Congress last amended the ICA in 1995, it retained all of the deregulatory reforms and most of the regulatory policies and provisions of the Staggers Rail Act while terminating the Interstate Commerce Commission (ICC)
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From page 13... ...
e future role of the Surface Transportation Board in regulating railroad rates, service levels, and the railroads' common carrier obligations, particularly as railroads may become revenue adequate. is report presents the results of the congressionally requested study, which was conducted by a committee of experts in economics, regulatory policy, and freight transportation.
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From page 14... ...
Instead, elements of both industries had grown less efficient under regulation, and the industries were seen as unresponsive to the interests of shippers and travelers. Accordingly, their deregulation was focused on unleashing market forces in the hope of making service offerings more innovative and less expensive for consumers rather than spurring industry financial recovery and stability.7 In contrast, the railroad industry's financial problems were threatening its continued exis3 e two major acts preceding the Staggers Rail Act were the Regional Rail Reorganization Act of 1973 (3-R Act)
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From page 15... ...
. By 1976, the federal government had taken over intercity passenger rail services and consolidated the assets of several bankrupt freight railroads to create Conrail, which would require more than $7 billion in federal subsidies between 1976 and 1981 (CQ Almanac 1982)
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From page 16... ...
To do so, the law limited the ability of railroads to enter markets; regulators had to be convinced that entry would 11 is section provides a brief and somewhat simplified overview of conditions in the railroad industry preceding the Staggers Rail Act's passage. More in-depth historical reviews are given by Keeler (1983)
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From page 17... ...
. Rather than rates being set according to the willingness of any individual shipper to pay for a railroad's service, they would be set more uniformly among shippers moving a "like kind of traffic" so that shippers of higher-value goods -- who inherently valued the rail transportation service the most -- would pay the highest rates regardless of any competitive alternatives enjoyed by some of those shippers (i.e., shippers having multiple rail service options)
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From page 18... ...
. Regardless of demand and supply conditions, railroads were not allowed to adjust the prices they charged for the provision of rail cars.
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From page 19... ...
. In its adherence to both the ICA and the common law doctrine of ensuring that all shippers of the same commodity received similar service at similar rates,16 ICC was slow to grant railroads the ability to charge higher rates for their bulk traffic even in markets where they could have charged a premium because of the absence of effective competition from other railroads and barges.
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From page 20... ...
Nature of Regulatory Reforms in the Staggers Rail Act Congress enacted a series of regulatory reforms during the 1970s that culminated in passage of the Staggers Rail Act of 1980. e act introduced several critical reforms aimed at giving railroads greater freedom to price and structure their service offerings and to control their production capacity.
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From page 21... ...
e price-differentiating railroad would now be able to set rates at levels that avoid pricing any profitable traffic flows out of the market.19 If successful, the deregulated railroads could earn the revenues needed to keep supplying rail service over the long term and perhaps earn even more. Freedom of Operations and Capacity Utilization e Staggers Rail Act contained provisions that would help the financially distressed railroads restructure their oversized and misaligned networks.
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From page 22... ...
Assurance of Reasonable Rates in Markets Lacking Effective Competition e aforementioned freedom to set rates was limited by a single requirement, applicable to common carrier service only, for "reasonable rates where there is an absence of effective competition and where rail rates 20 Railroads had never been required to quote a rate for a partial move that they could otherwise serve fully. e Staggers Rail Act did not change this practice despite its other provisions giving railroads more market power.
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From page 23... ...
is regulatory backstop could also provide shippers with some downward pressure on rates and leverage in negotiating contracts in markets lacking effective competition. Preservation of the Obligation to Provide Common Carrier Service Before the regulatory reforms that commenced in the 1970s, all rail service was provided by common carriage, and thus all regulations concerning common carriage had general applicability.
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From page 24... ...
in attaining such revenue levels" as needed to "provide a flow of net income plus depreciation adequate to support prudent capital outlays, assure the repayment of a reasonable level of debt, permit the raising of needed equity capital, and cover the effects of inflation."24 In passing the Staggers Rail Act 4 years later, Congress elevated revenue adequacy to one of the chief policies of the revised regulatory program. In addition to keeping the 4-R Act's requirement that ICC assist railroads in attracting and retaining capital, the act directed ICC to "maintain, and revise as necessary, standards and procedures" to "annually determine which rail carriers are earning adequate revenues."25 e provision requiring annual revenue adequacy determinations resides in the section of the law governing the adjudication of rate reasonableness disputes.
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From page 25... ...
] .27 A major implementation challenge facing ICC was the law's new requirement of maintaining reasonable rates for common carriage in markets lacking effective competition.
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From page 26... ...
Rapid Turnaround and Transformation of the Railroad Industry Passage of the Staggers Rail Act paid early dividends. If ending government subsidies had been a main impetus for the law, success was 28 In making this ruling, known as the "bottleneck" decision, ICC referred to a long-standing history in railroad rate regulation that the reasonableness of a rate is to be assessed on a "through" basis to preclude requirements that a railroad quote tariff rates for partial routings when it was capable of providing the full routing on its own.
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From page 27... ...
e Class I railroads became specialists in the long-distance movement of freight, as the average length of a haul increased by nearly two-thirds from 1970 to 1995. Many shippers located along thousands of miles of lightly used branch lines divested by the major railroads were served by hundreds of regional and short-line railroads, many of which commenced operations after passage of the Staggers Rail Act.29 By the mid-1990s, more than 400 of these railroads, most of which connect with and feed traffic to the major railroads, operated more than 40,000 miles of divested track.
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From page 28... ...
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From page 29... ...
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From page 30... ...
Although railroad capital expenditures declined slightly in real terms between 1979 and 1995, expenditure levels grew in relation to freight revenue and to the leaner railroad system overall. e early effects of the Staggers Rail Act on productivity, rates, and service quality have been studied by economists.
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From page 31... ...
McFarland (����) ����–���� Average rates Unchanged MacDonald (����)
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From page 32... ...
Rail Rates Studies, Early Postderegulation Period Authors and Year of Publication Period Studied Measure Studied Response to Staggers Rail Act Reforms the Staggers Rail Act, but they are generally consistent in finding that even shippers who experienced rate increases at the outset were likely to experience real rate declines of 10 to 25 percent by the start of the 1990s, when the effects of the law's reforms had taken hold. For the most part (as discussed in more detail later)
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From page 33... ...
In the 25 years since passage of the Staggers Rail Act, ton-miles had increased by nearly 90 percent; track miles and employees had declined by 41 and 63 percent, respectively; and average RPTM had fallen by 60 percent in real terms (Table 1-1)
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From page 34... ...
e increases were noticed by shippers, who had grown accustomed to a secular decline in rates over the previous two decades. Service disruptions had occurred after the merger of the Union Pacific and the Southern Pacific Railroads in 1996, and more episodic service disturbances had been experienced during 2004.32 Shippers expressed concern that consolidation of the railroad industry and efforts to rationalize capacity were contributing to the rising rates and perceived increases in the frequency and duration of service disruptions.
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From page 35... ...
had been largely complete. A primary role of the successor STB would be to administer the residual regulatory program, a key component of which was the protections afforded to captive shippers from unusually high common carrier rates and unresponsive service.
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From page 36... ...
e revised procedures placed less emphasis on improving the financial health of railroads and more on preserving sufficient levels of competition, as had been advised by USDOJ. After the moratorium, merger applications involving Class I railroads ceased; nevertheless, shippers complained that many opportunities to preserve beneficial competition and levels of capacity had been lost over the previous two decades.36 Access to Rate Relief Procedures Rail shippers also raised concerns about the cost and complexity of evidentiary standards intended to detect unreasonably high rates in markets that lacked effective competition.37 e development of these standards proved particularly challenging for ICC as it sought to respect the law's interest in the attainment of revenue adequacy by railroads.
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From page 37... ...
. e ability of coal shippers to use the SAC standard at least held out the possibility that the law's rate relief protections would deter high coal rates and provide coal shippers with greater leverage when contracts were negotiated.
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From page 38... ...
Over the past decade, a number of rate relief cases have been filed by shippers of chemicals, as well as coal, under the expedited procedures for assessing market dominance and reasonable rates.40 Railroads have expressed concern that restrictions placed on the evidence allowed in market dominance inquiries have led to exaggerated findings of market power, particularly by failing to account for a shipper's ability to discipline rates by shipping to other markets and by changing its production levels and locations.41 Overall, however, shippers of many commodities that move predominantly by common carriage, including bulk grain and other farm products, have not used the simplified procedures. ese shippers maintain that the caps on awards were too low to justify the expense of bringing a case, the standards (including a simplified version of SAC)
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From page 39... ...
ey contend that the new findings of railroad profitability are relevant to the law's stated policy "to maintain reasonable rates where there is an absence of effective competition and where rail rates provide revenues which exceed the amount necessary to maintain the rail system and to attract capital."45 Some would like to see STB expand access to rate relief by taking a less cautious approach to safeguarding railroad revenue adequacy and profits.46 Railroads contend that because they are capital intensive, the concern over sustaining revenue adequacy and the profit incentive that encourages capacity investments must remain at the forefront of regulatory policy. ey argue that using an industrywide cost-of-capital measure to assess rate relief is tantamount to a profitability test that would be impractical to administer and contradict the law's policy of minimizing federal regulatory control.47 Common Carrier Service Expectations Shipper complaints of railroads violating their common carrier duties by not complying with reasonable requests for service date back to the beginning of the U.S.
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From page 40... ...
Railroads would like to see such shipments made exempt from standard terms of common carriage to allow negotiation of compensatory rates and the addition of legal protections from potentially ruinous liability.50 Petitions for Competitive Access When railroads began canceling their legacy terminal access, trackage rights, and reciprocal switching arrangements as permitted by the Staggers Rail Act, many shippers complained that their rail transporta48 Allegations can be found in the large number of comments submitted to STB Ex Parte No.
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From page 41... ...
erefore, the committee did not conduct a historical review of railroad rate, service, and capacity changes since the 1980 Staggers Rail Act reforms. Instead, it focused on recent trends and developments that are more pertinent to the modern freight railroad industry that has emerged in the three decades since regulatory reform.
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From page 42... ...
Future role of the STB in regulating railroad rates, service levels, and the railroads' common carrier obligations, particularly as railroads may become revenue adequate. As part of the analysis undertaken to address the four areas above stipulated by Congress, the committee shall, to the extent possible based upon existing data and prior analyses, 1.
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From page 43... ...
For reasons explained in this report, the committee believes that mechanistic regulatory appraisals of a railroad's revenue adequacy can offer little, if any, insight for policy making. Nevertheless, it is evident that financial conditions in the freight railroad industry are fundamentally improved over the dire circumstances that prevailed in the 1970s and that prompted the regulatory reforms of the Staggers Rail Act.
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From page 44... ...
Foster sound economic conditions in transportation and to ensure effective competition and coordination between rail carriers and other modes; 6. Maintain reasonable rates where there is an absence of effective competition and where rail rates provide revenues which exceed the amount necessary to maintain the rail system and to attract capital; 7.
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From page 45... ...
Nevertheless, a particularly relevant observation from the CWS concerns the disparities among commodity groups in their use of common carriage. is observation was significant in informing the committee's assessment of the adequacies of the law's rate relief provisions, which apply only to common carrier traffic.
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From page 46... ...
In response to the third task in the study charge, Chapters 3 and 4 examine the design and implementation of certain provisions in the Staggers Rail Act. e provisions are intended to guarantee that shippers have access to common carrier service at a reasonable price and with adequate quality.
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From page 47... ...
A review of the obligation indicates how these data deficiencies will need to be addressed if the common carrier obligation is to remain relevant. e critiques of the annual railroad revenue adequacy appraisal by STB and the long-standing application of a public interest standard for reviewing railroad mergers raise fundamental questions about the continued relevance of these regulatory practices, especially in light of the railroad industry's financial turnaround.
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From page 48... ...
e committee, which was asked to advise on the agency's future role, draws on these findings to make a series of recommendations intended to address deficiencies in the current regulatory program and make it reflective of circumstances in the industry today, 35 years after passage of the Staggers Rail Act. REFERENCES Abbreviations AAR Association of American Railroads CBO Congressional Budget Office GAO General Accounting Office or Government Accountability Office USDOT U.S.
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From page 49... ...
1990. Railroad Regulation: Economic and Financial Impacts of the Staggers Rail Act of 1980.
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From page 50... ...
1991. e Interstate Commerce Commission and the Railroad Industry: A History of Regulatory Policy.
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