Federal policies governing the rail freight industry are no longer effective and should be replaced by rules reflecting a world that's different from when the industry was mostly deregulated in 1980, according to a report issued today by the Transportation Research Board (TRB).
The report, which was sponsored by the Department of Transportation, said that policies designed to protect so-called captive rail shippers—businesses that can only use railroads or in some cases just one railroad—are "not working," and that current dispute-resolution procedures must be reformed so shippers have adequate redress for their complaints over rate gouging. At the same time, any changes in the process must take into account the railroads' need to earn an adequate return on investments in their capital-intensive networks, the report said.
U.S. railroads have budgeted a record $29 billion on capital expenditures in 2015, according to the Association of American Railroads (AAR), the leading trade group for U.S. rails. Rails move about one-third of the country's freight traffic.
Under the Staggers Rail Act, the 1980 law that largely deregulated the railroads and brought them back from the brink of collapse, shippers were given the ability to challenge some rates that seemed unreasonable. However, the formula used to identify rates considered by a shipper to be so high as to be worthy of a regulatory challenge is "arbitrary and unreliable," according to the committee that prepared the report.
The committee recommended that the Department of Transportation develop a formula that compares the disputed rates with those charged in competitive rail markets for comparable shipments. This would enable the Surface Transportation Board (STB), the federal agency that regulates railroads, to more efficiently determine if a shipper paying an unusually high rate is entitled to some form of relief, according to the report.
Repealing the current formula, based on an arcane methodology known as "stand-alone costing," which determines a rate set by a hypothetical, optimally efficient railroad and makes that rate the maximum the real railroad can charge, would require congressional action.
The STB makes decisions independently, although it is administratively affiliated with DOT.
The committee recommended the current practice of holding STB hearings on rate reasonableness disputes be replaced by independent arbitration hearings that will speed up the process. "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," according to the report.
The committee suggested that parties involved in rate disputes that have gone to arbitration be allowed to use a tactic known as "reciprocal switching" - which allows shippers to transfer freight at the interchange of tracks owned by competing railroads - as a remedy for unreasonable shipping rates. It also said the Department of Justice should assume the STB's responsibility for reviewing rail mergers.
"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," said Richard Schmalensee, committee chair and the Howard W. Johnson professor of management emeritus and professor of economics emeritus at the Massachusetts Institute of Technology, in a statement accompanying the report's release.
Schmalensee said 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. Bruce Carlton, president and CEO of the National Industrial Transportation League (NITL), a trade group consisting of many rail users, applauded the findings, saying in an e-mail that the TRB committee has "put an informed spotlight on the problem of squaring regulatory practices that were created to protect an industry facing massive failure 35 years ago with today's very successful freight rail industry."
Carlton said he was happy the committee advised the use of reciprocal switching to resolve certain disputes. A July 2011 NITL proposal to allow for reciprocal switching under certain circumstances has languished at the STB since then, with little progress.
Edward Hamberger, AAR's president and CEO, called the TRB report a "solution in search of a problem," saying in a statement that it would "upend the real-world concrete successes achieved" since Staggers was passed. AAR has said that rail customers today pay rates that are, on average, 43 percent less, on an inflation-adjusted basis, than they paid in 1980.
At an STB hearing today on the rail movement of grain shipments, AAR said grain rates have increased, in total, by 86 percent from 1990 to 2013, not adjusted for inflation. By contrast, the costs of seed, fertilizer, and fuel, have risen by 271 percent, 216 percent, and 257 percent, respectively, over that same period, the group said. Of the nine major cost inputs for grain producers, freight rates have grown more slowly than all except "farm supplies and repairs," which rose at a rate of 79 percent, AAR said.
Timothy J. Stafford, AAR's associate general counsel, told the board that grain shippers have avenues available to them at the STB to review their freight rates, adding that proposals to require binding arbitration or establish formula-based rate review processes are "nothing more than further attempts by certain shipper groups to use the federal government to get themselves below-market rates."
TRB is part of the nonprofit National Research Council.