Modernizing Freight Rail Regulation (2015) / Chapter Skim
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5 SUMMARY ASSESSMENT AND RECOMMENDATIONS
5 SUMMARY ASSESSMENT AND RECOMMENDATIONS
Pages 179-219
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From page 179... ...
e Staggers Rail Act was successful in enabling the development of an efficient, innovative, and financially strong freight railroad industry,
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From page 180... ...
STUDY CONTEXT Regulatory Reforms of the Staggers Rail Act e Staggers Rail Act of 1980 made fundamental changes in the federal railroad regulatory program. When the act was passed, the country's private freight railroad industry was in financial and physical decline.
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From page 181... ...
Railroads would thus have an enhanced ability to concentrate traffic in more efficient movements and to charge "captive" shippers rates corresponding to their willingness to pay. Although the law permitted regulators to order access agreements if they were deemed "necessary to provide competitive rail service," such interventions were not required, and regulators ordered them only on rare occasions out of respect for the law's interest in revenue adequacy.
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From page 182... ...
Unlike the comprehensive deregulation laws that were enacted contemporaneously for other transportation industries, the Staggers Rail Act preserved a number of economic regulations and added requirements intended to protect the interests of shippers who might be harmed by the regulatory reforms. A tenet of railroad regulation arising from common law is that railroads are "common carriers," obligated to provide service to all shippers on reasonable request and "without discrimination." is obligation was preserved for all traffic that could not be moved competitively by truck.
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From page 183... ...
With rates deregulated and allowed to change, service terms and levels could be expected to change as well. e Staggers Rail Act simply required that all common carrier rates be "reasonable." e reasonableness standard in railroad regulation had evolved from common law notions of fairness implying that similarly situated shippers should pay generally similar rates.
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From page 184... ...
e few postderegulation studies that tracked and placed monetary values on changed service, such as reductions in shipper inventory costs through faster and more reliable movements, concluded that the benefits to shippers from improved rail offerings were comparable with those from the reductions in rates. Shipper Concerns and Issues Post-2000 During the early 2000s, signs appeared that the postderegulation efficiency gains of the railroad industry were largely complete.
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From page 185... ...
ey expressed concern that these developments had contributed to the secular rise in rates and to a potential for future demands for rail service to go unmet. e upward trend in rates and episodic service disruptions renewed concerns that had been expressed by some shippers since ICC's initial implementation of the Staggers Rail Act: • Shippers maintained that regulators interested in improving the financial position of the railroads by curtailing excess capacity had placed too little emphasis on protecting shippers from unreasonable rates and unreliable service.
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From page 186... ...
• Shippers expressed concern that access to rate relief for common carrier service had been substantially restricted because of the procedures used by regulators in assessing the reasonableness of disputed rates. Rate cases applying the evidentiary standard introduced by ICC in 1985 for coal shippers could take years to adjudicate and had large minimum litigation costs that deterred rate challenges by shippers of smaller volumes over more varied routes.
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From page 187... ...
By 2006, three of the seven Class I railroads were declared revenue adequate by STB. e finding caused some shippers to call for a reevaluation of the regulatory program's emphasis on promoting revenue adequacy and for the restructuring of rate reasonableness procedures to offer expanded opportunities for relief.
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From page 188... ...
During the decade, coal shippers had turned almost exclusively to contract carriage. Shippers of grain remained the most committed to common carriage and to posted tariff rates, which still accounted for more than three-quarters of grain ton-miles in 2012.
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From page 189... ...
e STB complaint record is naturally skewed toward shippers using common carriage because only their service is overseen by STB. An objective assessment of service quality might have been possible if shipmentspecific data on service quality were available.
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From page 190... ...
Many aspects of the railroad regulatory program affect this balance. In view of the impracticality of reviewing them all, the study concentrated on five major regulatory provisions that remain controversial because of the substantial transformation of the railroad industry in the wake of the Staggers Rail Act.
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From page 191... ...
Methods for assessing rate reasonableness lack a sound economic rationale and are unusable by most shippers; sounder and more economical methods are needed: e commitment to the stand-alone cost test and other URCS-dependent methods for assessing disputed rates has produced inequalities in shipper access to the law's maximum rate protections. Faster, sounder, more transparent, and more economical methods are available for resolving rate disputes and could give more shippers the opportunity to pursue rate relief.
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From page 192... ...
e Staggers Rail Act gave railroads substantial freedom to set prices but restricted this freedom for common carriage rates when a railroad has market dominance. Market dominance is defined in the law as the absence of effective competition from other railroads or modes of sampling program that STB uses for monitoring railroad traffic and rates, and examples can be found in other transportation industries, such as the on-time performance data that are collected for each airline flight.
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From page 193... ...
e following are the committee's findings concerning the procedures used for each step. Variable Cost Allocations Are Invalid and Unreliable In stipulating that the variable cost of a priced unit of traffic be calculated as a means of screening it for eligibility for rate relief, the Staggers Rail Act created an insoluble problem for regulators.
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From page 194... ...
After passage of the Staggers Rail Act, ICC introduced the Uniform Railroad Costing System (URCS) to fulfill the law's requirement to estimate "the variable cost for particular movements." URCS is a cost allocation scheme that proceeds in a manner similar to that described above.
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From page 195... ...
Hence, URCS makes arbitrary distinctions about which traffic qualifies for rate relief, and it does so in a nonrandom manner that is untenable. Accordingly, the committee finds that URCS is neither an economically meaningful nor a reliable tool for making regulatory determinations about eligibility to pursue rate relief.
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From page 196... ...
While those data could be refined, replacement of cost allocation methods such as URCS with more credible, empirically based tools for identifying unusually high rates is now more practical. Time Limits on Market Dominance Inquiries Are Essential When a tariff rate exceeds the 180 percent revenue-to-variable-cost threshold and a shipper paying that rate complains, the law requires a review of the competitive structure of the market in question, often referred to as a qualitative assessment of market dominance.
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From page 197... ...
With time limits, categorical limits on evidence are unnecessary. Methods for Assessing Rate Reasonableness Lack a Sound Economic Rationale and Are Unusable by Most Shippers If a shipper can prove it ships in a dominated market and its rate exceeds 180 percent of the URCS-determined variable cost, it is eligible to challenge its rate on the basis of one of three methods for judging rate reasonableness.
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From page 198... ...
e SAC process was originally introduced to resolve rate disputes brought by coal shippers, who ship large, regular volumes in fixed cor
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From page 199... ...
In so doing, the agency indicated its continued commitment to a cost-based approach for assessing rate reasonableness and to linking the assessment process to the interest of ensuring railroad revenue adequacy. Shippers of some commodities that are heavy users of common carriage, including grain, have not demonstrated the ability to use the expedited methods after more than 15 years.
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From page 200... ...
e serious deficiencies in the current screening process need to be rectified before more usable procedures for rate dispute resolution that respect the law's interest in revenue adequacy can be implemented. If a more reliable screening process is implemented, faster, sounder, more transparent, and more economical methods are available for resolving rate disputes that would give more shippers the opportunity to pursue rate relief.
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From page 201... ...
e committee finds that regularly collected, usable data on service quality are needed to evaluate service performance. In particular, shipment-specific data could help ascertain whether service provided in common carriage is substantially inferior to that provided in contract carriage and whether any service differentials change markedly when capacity is tight.
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From page 202... ...
Such public utility–type regulation has never been used to regulate railroads and would be at odds with the Staggers Rail Act, a central policy of which is to minimize the need for federal regulatory control. e committee finds that the annual revenue adequacy determination no longer provides meaningful information for policy making.
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From page 203... ...
By law, STB must consider a range of potential effects from a merger, including impacts on the competitive structure of markets, rail workers, safety, and the ability of the applicants and other railroads to earn adequate revenues. In contrast, merger reviews conducted by the antitrust agencies focus exclusively on whether the transaction is likely to "substantially lessen competition." In most transportation industries, merger reviews are conducted by the Antitrust Division of USDOJ on the basis of well-defined and transparent analytic methods, evidentiary procedures, and review timelines.
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From page 204... ...
Reciprocal Switching Orders: A Potential Remedy for Unreasonable Rates (Chapter 4) e Staggers Rail Act made it easier for a railroad to cancel terminal access, trackage rights, and reciprocal switching agreements with competitors for traffic that it could serve by itself.
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From page 205... ...
One possible starting point for assessing reciprocal switching on a more limited basis is to allow its use as an optional remedy for rates that have been ruled unreasonable and thereby to provide an alternative to a prescribed rate. RECOMMENDATIONS FOR REGULATORY CHANGE A presumption of this study has been that policy makers are satisfied with the overarching policies of the Staggers Rail Act, such as allowing railroads to achieve revenue adequacy and shippers to obtain reasonable rates.
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From page 206... ...
ere should be no restrictions on the types of evidence -- such as that pertaining to product and geographic competition -- that can be introduced to assess market dominance. Replace STB rate reasonableness hearings with an arbitration procedure that compels faster rulings on disputes involving rates found eligible to be challenged because they substantially exceed their competitive benchmarks.
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From page 207... ...
Allow the parties in rate arbitrations to propose reciprocal switching arrangements in their offers to resolve the dispute if they so desire and allow the arbitrator to order that such arrangements be made. End annual revenue adequacy determinations; require periodic assessments of industrywide economic and competitive conditions.
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From page 208... ...
To improve the accuracy, utility, timeliness, and availability of the Carload Waybill Sample to implement the competitive rate benchmarking tool and enable more independent analyses and beneficial uses; 2. To obtain shipment-level data on service quality to monitor the railroads' responsiveness to the common carrier obligation; and 3.
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From page 209... ...
Even though the variable cost allocations are inherently arbitrary, they play a significant role in deciding which rates qualify for relief. Comparisons with actual shipment prices are bound to produce distorted depictions of market dominance and other illogical outcomes, such as consistently showing large amounts of traffic moving at an economic loss.
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From page 210... ...
e recommended competitive rate benchmarking model approach would be no more complicated to construct and run, and would probably be less so, than the annual derivation of variable costs from URCS. e complexity of the latter has prevented its basic structure from being changed for decades despite fundamental methodological flaws.
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From page 211... ...
Replace STB rate reasonableness hearings with an arbitration procedure that compels faster rulings on disputes involving rates found eligible to be challenged because they substantially exceed their competitive benchmarks. Recommendation: End STB's direct role in adjudicating rate disputes and prescribing penalties and remedies.
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From page 212... ...
However, if market dominance is not found to the satisfaction of the arbitrator, he or she should be guided by STB instructions either to dismiss the challenge or to accept the railroad's offer. STB should identify candidate arbitrators and require professional qualifications that are not so restrictive with regard to specialized railroad industry expertise that the processing of challenges may be slowed.
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From page 213... ...
Under the proposed competitive rate benchmarking approach, revenue adequacy could be protected at the outset of the process on the basis of transparent choices made by regulators about the strictness of the benchmarking screens. Use of the proposed competitive rate benchmarking tool would allow all subsequent phases of the rate relief process to be made more economical and usable, since they would no longer serve as the main safeguards for revenue adequacy.
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From page 214... ...
End annual revenue adequacy determinations; require periodic assessments of industrywide economic and competitive conditions. Recommendation: End the requirement for annual determinations of each railroad's revenue adequacy status.
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From page 215... ...
By sponsoring periodic assessments of economic and competitive conditions in the industry as a whole on the basis of more varied data and analytic techniques, Congress and STB would obtain a richer set of information to support regulatory decisions and policies. Transfer merger review authority to the antitrust agencies, which would apply customary antitrust principles rather than a public interest standard.
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From page 216... ...
Recommendation: STB should be given the direction and resources to undertake a strategic review of all of its data programs. e review should begin with the role of the CWS in enabling implementation of the recommended competitive rate benchmarking system and in facilitating academic and other research on the railroad industry that can inform policy making.
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From page 217... ...
Recommendation: As part of a strategic review of its data programs, STB should appraise the data needed to fulfill its role in supervising the supply of common carrier service. For example, consideration should be given to collecting information that permits the tracking of the time elapsed from a shipper request for service to rail car placement, removal, and arrival at the destination, perhaps in conjunction with information on the scheduled delivery time.
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From page 218... ...
Adoption of the recommended actions, such as discontinuation of URCS, SAC assessments, public interest appraisals of mergers, and formulaic annual revenue adequacy determinations, should have farreaching implications for the agency's needs for railroad financial and operations data. e resources saved from any streamlining or simplification of these data programs could be used to enhance the agency's other data programs on rates and service quality.
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From page 219... ...
It would continue the process begun by the Staggers Rail Act -- a process aimed at producing a modern, efficient, and competitive railroad industry able to attract capital, maintain and expand its capacity, and serve its customers with a minimum of regulatory oversight.
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