While a 1980 reform law enabled the modernization and stabilization of the U.S. freight railroad industry, federal regulation has not kept pace with the industry's transformation and should be replaced with a system better-suited for today's freight rail system, says a new congressionally mandated report from the National Research Council's Transportation Research Board. Current policies designed to protect rail shippers who lack transportation options from excessive rates are not working for shippers of most commodities, including grain. More appropriate, reliable, and usable procedures are needed to resolve these rate disputes without threatening the earnings railroads need to pay for their capital-intensive networks.
The Staggers Rail Act of 1980 eliminated or eased many regulations governing railroad pricing and operations and allowed railroads to redress decades-long declines in traffic, stagnant productivity, and oversized networks that had become chronically under-maintained and misaligned with demand. By the late 1990s, the Staggers Rail Act had succeeded in spurring the development of a financially stronger, more productive, and more innovative railroad industry that was better able to compete with trucks, invest in capacity, and respond to shippers' needs.
Approximately one-third of all freight traffic today is moved by rail, and shippers of bulk commodities such as grain, coal, and chemicals remain especially dependent on rail. Since 2000 their rates have been rising faster than inflation, and complaints about unreliable railroad service have been voiced by some shippers, the report says. Under the Staggers Rail Act, shippers have the ability to challenge some rates that seem unreasonable, but the formula used to identify unusually high rates that can be challenged is arbitrary and unreliable. The committee that wrote the report recommended that the U.S. Department of Transportation develop, test, and refine a more reliable tool that compares disputed rates to those charged in competitive rail markets for comparable shipments. Repealing the current formula would require congressional action.
This replacement would, in turn, allow the Surface Transportation Board (STB), which regulates railroads, to use faster and more economical methods for judging whether a shipper paying an unusually high rate is entitled to relief. Customary 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 useable have yet to be developed. Therefore, the committee recommended STB hearings that are used to rule on whether a challenged rate is reasonable be replaced with independent arbitration hearings that compel faster, more economical resolutions of rate cases.
The committee also recommended permitting parties in rate arbitrations to propose reciprocal switching -- allowing shippers to transfer freight at the interchange of tracks owned by competing railroads -- as a remedy for unreasonable shipping rates.
The Staggers Rail Act mandates that regulators not grant rate relief so freely that railroads are denied the revenues they need to invest in their networks, and the committee recognized that railroads need to be able to charge rates that generally exceed their operating costs.
"The committee's two main recommendations go hand-in-hand," said committee chair Richard Schmalensee, Howard W. Johnson Professor of Management Emeritus and professor of economics emeritus at the Massachusetts Institute of Technology. "Currently, burdensome STB rate hearings compensate for an unreliable initial process for identifying unusually high rates and in effect, they safeguard railroad revenues by making it too costly for most shippers to litigate a case. So, a more credible method for identifying unusually high rates would permit the use of less burdensome arbitration procedures, while not risking the adequacy of railroad revenue."
STB should discontinue issuing annual reports on the revenue adequacy of individual railroads, and its responsibility for reviewing railroad mergers should be transferred to the U.S. Department of Justice because these STB functions no longer serve their original purposes. Finally, the committee recommended a thorough review of the data collection and dissemination practices of STB. Data that would permit systematic assessment of railroads' service quality would be especially valuable.
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