Modernizing U.S. Freight Rail Regulation

A special issue of the Review of Industrial Organization (2013) (Vol 43) considered the impetus for the legislation (Brown 2013; Henrickson and Wilson 2013; Peoples 2013), for and the effects of this legislation (Blonigen and Cristea 2013). It was passed during a period of enormous growth (Wilson 2013, high prices, and discriminatory prices (Boyer 2013; Brennan 2013; MacDonald 2013).

These are discussed more completely in TRB (2015), Keeler (1983), Wilson and Burton (2004), Gallamore (1999), Gallamore and Meyer (2014) and others.

By mid-1970s, railroads were going bankrupt, and about one-fifth of trackage was operated by bankrupt and bailed-out railroads (GAO 1990, 10). As noted by Keeler (1983, pp. 16–17) an estimated 47 % of freight rail revenues were being earned by railroads that could no longer be considered financially viable.

There are also a wide range of both government reports as well as academic papers that hit on these issues as well. Government reports include: GAO (1987, 1990, 1999, 2006), USDA (2004), and of course, the report on which this paper is based (TRB Special Report 318, 2015), while academic works include Keeler (1983), McFarland (1989), Barnekov and Kliet (1990), Burton (1993), Wilson (1994, 1997), MacDonald and Cavalluzzo (1996), Winston (1998), Winston et al. (1990) and others.

Public Law 109-59, section 9007.

Schmalensee served as Chair of the Study Committee.

The Standard Transportation Commodity Codes (STCC) are typically used to identify commodities shipped. These are maintained by RailInc. In these data, there are in excess of 9600 seven-digit codes, each representing a different commodity. In the Carload Waybill Statistics, maintained by the Surface Transportation Board (STB), there are movements of over 9500 commodities (STCC level seven codes) between 18,961 origins (Standard Point Location Codes) and 17,224 terminal locations (Standard Point Location Codes) from 1984 to 2013. These account for about 1.7 million different origin–destination–commodity triples.

The unit input costs are measured by the STB’s productivity-adjusted “rail cost adjustment factor” (RCAF-A). It summarizes railroads unit-of-output costs and represents the net effects of input price changes and productivity changes. More information can be found on the STB’s website and the American Association of Railroads (http://​www.​stb.​dot.​gov/​stb/​industry/​rcaf.​html and https://​www.​aar.​org/​data-center/​rail-cost-indexes).

Miles of road is a commonly used measure of network size. It measures the non-redundant miles in the network. Miles of track includes all track miles in the network. From Table 2, the ratio of miles of track to miles of road has remained essentially constant for Class I railroads between 1975 and 2013.

In 2013, there were seven Class I railroads in the US. Class I status is based on an operating threshold that changes over time. In 2013, the threshold was annual revenues of $467 million or more (Class I Railroad Statistics, Association of American Railroads 2015). These railroads account for over 90 % of industry revenues, and operate nearly 70 % of railroad miles of road (AAR, Railroad Facts).

The AAR (2015) recommends caution in comparing the number of Class I railroads in 1980 with the number in 2014. For example, of the 40 railroads that were classified as Class I in 1980, 14 would not have qualified according to today’s Class I revenue requirements, even after adjustment for inflation. AAR also points out that one of the other 26 Class I railroads in 1980 provided mostly passenger service, two were bankrupt before deregulation, and five were legally distinct entities but had unified operations, marketing, and administration even before 1980. A more reasonable estimate, according to AAR, is that 18 Class I rail systems existed in 1980 and ultimately merged to form the seven that remain. Even with this accounting, however, the number has still fallen dramatically from 18 to 7.

There was a definitional change that required the inclusion of terminal delay in train hours beginning in 1980. This means that the numbers before and after 1980 are not comparable; such comparisons understate the increase in output per train hour.

The STB was created in 1996 to assume some of the regulatory functions of the ICC when the latter was abolished. The STB operated within the Department of Transportation until December 18, 2015, when Public Law No. 114-110 took effect and it became an independent agency.

However, the fact that the standard exceeds 100 % could be interpreted as a rough-and-ready acknowledgement that common network costs have to be covered by (at least) some rates that exceed variable costs.

For a more detailed discussion of URCS, see Wilson and Wolak (2016).

Cost accounting principles in Title III, section 301, §11162 of the Staggers Rail Act of 1980.

Carriers allocate their total expenses into thousands of expense accounts and provide several hundred different operating activities (STB 2010). These data are audited and then used to create the URCS master file (UMF).

The URCS program is available at stb.dot.gov/stb/industry/urcs.html. It permits users to specify shipment characteristics, and the program estimates activities that the movement requires and multiplies these by the associated unit costs from Phase II to calculate variable costs. There is considerable information available in Wilson and Bitzan (2003), Rhodes and Westbrook (1986), and a variety of other sources.

There are a number of related studies. See, for example, Wilson and Wolak (2016) as well as Rhodes and Westbrook (1986).

It is noted that the presence of competition may reflect the so-called “Cellophane Fallacy” wherein the presence of competition may reflect higher monopoly prices. Indeed, as pointed out by a reviewer, a profit-maximizing railroad should always be maintaining a price (rate) for a movement at a level where a higher rate would cause too much of the traffic to be lost (diverted to trucks, etc., or just evaporated). So, there should never be an apparent “absence of competition…”. Unless, of course, at the monopoly price the rivals cannot compete.

STB NOR No. 42123, M&G Polymers USA, LLC, v. CSX Transportation, Inc.

STB NOR No. 42123, M&G Polymers USA, LLC, v. CSX Transportation, Inc. The STB reasoned that truck prices close to 180 % of R/VC would be a clear indicator of the competitive viability of trucks; however, the agency needed to establish how high the R/VC percentage could go before attracting truck competition. To do this, STB consulted URCS to calculate an R/VC that the railroad would need to average for all of its potentially high (>180 %) R/VC traffic in order to earn a return on investment equal to the cost of capital. (The idea was that the traffic above 180 % R/VC is primarily responsible for the railroad’s revenue adequacy.) STB then compared this average R/VC with the R/VC that would trigger truck competition. STB ruled that the latter exceeding the former would indicate that trucks do not provide an effective means of competition. Because the URCS variable cost numbers are essentially arbitrary, so is this procedure.

The seminal paper was Faulhaber (1975).

Of course, even an inefficient entrant can improve social welfare if it causes the price to fall sufficiently so that the welfare triangle gain exceeds the loss from the inefficient production. See Economides and White (1995).

Indeed, the second constraint of the Coal Rate Guidelines specifies that “a captive coal shipper would not be required to bear the cost of demonstrated management inefficiencies in the carrier’s operations and pricing structure” (ICC 1985, p. 2).

STB Ex Parte No. 715, Rate Regulation Reforms, July 8, 2013, pp. 10–11.

See shipper comments to STB Ex Parte No. 665-1, Rail Transportation of Grain, Rate Regulation Review. In particular, see comments by the National Grain and Feed Association, June 26, 2014, p. 14. In revising the simplified procedures in 2007, STB concluded that shippers were reluctant to use the simplified procedures because of vagueness in the requirements and uncertainty about eligibility.

This requirement tends to motivate parties to settle and to avoid making extreme offers; see Kochan and Katz (1988, pp. 279–284).

The ICC defined adequate revenues as those achieving the level necessary for a railroad to compete equally with other firms for available financing to maintain, replace, modernize, and, where appropriate, expand its facilities and services. ICC Ex Parte No. 393, Standards for Railroad Revenue Adequacy.

^The STB regulates interstate pipelines that carry products other than petroleum, natural gas, and water. In 2000, shippers of anhydrous ammonia successfully challenged the rates that were charged by a pipeline operator by using the revenue adequacy standard from the Coal Rate Guidelines. See STB Docket No. 41685, CF Industries, Inc., v. Koch Pipeline Company, LP, May 3, 2000.

Gallamore and Meyer (2014, p. 137) note that from the mid-1950 s through the 1960 s the ICC approved 16 major mergers, only two or three of which had mostly end-to-end characteristics. They report that the ICC turned down only four major mergers during the 1950s and 1960s, and two were end-to-end.

S. Rep. No. 94-499, 94th Congress, 1st Sess. 2a (1975), Sections 101 (a) (2) and (b) (2), U.S. Code Cong. & Ad. News 1976, pp. 13, 34.

“Practicable and in the public interest” was historically interpreted by ICC as requiring the demonstration of “some actual necessity or compelling reason” why such an arrangement should be ordered. Such a showing would need to entail “more than a mere desire on the part of shippers or other interested parties for something that would be convenient or desirable to them” [Jamestown Chamber of Commerce v. Jamestown, W. & N.R. Co., 195 ICC 289, 291 (1933)].

49 USC §111103(c). Specifically, the law states that STB “may require rail carriers to enter into reciprocal switching agreements, where it finds such agreements to be practicable and in the public interest, or where such agreements are necessary to provide competitive rail service.”

ICC Ex Parte 445, Intramodal Rail Competition, codified at 49 CFR 1144.

See Baltimore Gas and Elec. v. U. S., (D.C. Cir. 1987) and Midtec Paper Corp. v. U.S., 857 F.2d 1467 (D.C. Cir 1988).

The argument is recounted in Midtec Paper Corp. v. U.S., 857 F.2d 1457 (D.C. Cir. 1988).

One recent example of a legislative proposal to mandate reciprocal switching to enhance competition is the Railroad Competition and Service Improvement Act of 2007 (S. 953 and H.R. 2125). The bill would have defined “areas of inadequate competition” if shippers pay rates above 180 % of R/VC and are served by a single railroad. In such defined areas, the bill would authorize the STB to order reciprocal switching and terminal trackage rights.

The Study Committee benefitted enormously from access to the raw Carload Waybill Sample data.