STB's Railroad Revenue Adequacy

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By: Jerry Ellig

December 02, 2019

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Introduction

            The Staggers Rail Act of 1980 deregulated most freight rail rates but left the Interstate Commerce Commission (and now the STB) with responsibility for ensuring that rail rates are “just and reasonable” for shippers who lack good transportation alternatives to a single railroad. The STB can regulate a rate if the shipper complains to the STB, the STB finds that the railroad is “market dominant” for the shipment(s) at issue, and the STB finds that the rate is not just and reasonable. The Staggers Act essentially requires the STB to strike a balance between the goals of ensuring that rates are reasonable when a railroad lacks effective competition, providing “fair and expeditious” decisions when regulation is required, and ensuring that carriers earn adequate revenues to provide a “safe and efficient rail transportation system.”[1]

            This comment addresses three of four recommendations from the STB’s Rate Reform Task Force[2] that the STB asked hearing participants to address in its Notice of Public Hearing: (1) Define and calculate long-term revenue adequacy for individual railroads over a multi-year period, (2) Place a ceiling on rate increases for railroads that are long-term revenue adequate and have market dominance over the particular shipment at issue, and (3) Remove bottleneck protections for long-term revenue adequate carriers, so that a shipper could more easily get a regulated rate for the portion of a route on which a single railroad is market dominant and then negotiate with another railroad for a competitive rate on the remainder of the route.

            I fully agree with the comments on these proposals submitted by members of the Transportation Research Board’s Committee for a Study of Freight Rail Transportation and Regulation (TRB Study Committee), on which I served.[3] I am submitting this separate comment to comply with the STB’s requirement that individuals requesting to speak at the December 12, 2019 hearing must submit their written comments by November 26, 2019. This comment solely represents my own views, as it addresses some topics that the former members of the TRB Study Committee did not address in our collective comment. 

            The idea of calculating railroad revenue adequacy over a multi-year period is a sound one. However, such a calculation is just one aspect of a holistic and in-depth assessment of industry conditions. The STB should also analyze rate trends for shipments for which multiple indicia indicate that a railroad may be market dominant. Such an analysis could furnish systematic empirical evidence to help the STB determine whether there is a widespread, significant problem that might justify significant changes in the regulatory system.

            The STB should decline to adopt the proposed caps on rate increases. Because Uniform Rail Costing System (URCS)-based variable cost calculations do not measure true variable costs, caps that depend on URCS-based variable costs will achieve neither economic efficiency nor any concept of equity that depends on altering the markups shippers pay over true variable costs. Given the troubled history of rate regulation in the pre-Staggers era and the difficulty of making credible commitments to limit price regulation, the STB should exercise extreme caution in regard to any proposal for more extensive general rate regulation.

Before deciding whether to move forward with the bottleneck proposal, the STB should estimate the amount of traffic likely to be eligible for competitive access and the potential effect on railroad revenues and investment. These estimates would help the STB ascertain whether there is a widespread problem that might justify the regulatory change and whether the change would likely entail significant cumulative costs.

In two other proceedings, the STB has proposed a streamlined approach to assessing whether a railroad has market dominance[4] and a final offer process for small rate disputes.[5] These proposals, along with improvements suggested by the former members of the TRB Study Committee,[6] have the potential to effectively increase protections for captive shippers without the significant side-effects associated with the rate increase cap and bottleneck proposals discussed in this comment. I respectfully suggest that the STB’s resources could be better utilized by conducting a full regulatory impact analysis for those other two proceedings and adjusting the proposals based on what that analysis reveals.[7]

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[1] Staggers Rail Act of 1980, Public Law 96-448, §101.

[2] Rate Reform Task Force, Report to the Surface Transportation Board (2019) [Hereinafter referred to as “Rate Reform Task Force Report.”]

[3]  See Kenneth D. Boyer, Jerry Ellig, José A. Gómez-Ibáñez, Anne V. Goodchild, Richard L. Schmalensee, Wesley L. Wilson, and Frank A. Wolak, “Public Interest Comment The Surface Transportation Board’s Notices of Proposed Rulemaking: Docket No. EP 761, Railroad Revenue Adequacy, and Docket No. EP 722, Railroad Revenue Adequacy,” October 17, 2019. These individuals’ comments are based on the report they produced for the Transportation Research Board, Modernizing Freight Rail Regulation, Transportation Research Board Special Report No. 318 (2015),  https://www.nap.edu/download/21759 [Hereinafter referred to as “Modernizing Freight Rail Regulation.”]

[4] Surface Transportation Board, “Market Dominance Streamlined Approach: Notice of Proposed Rulemaking,” Docket No. EP 756 (September 11, 2019).

[5] Surface Transportation Board, “Final Offer Rate Review: Notice of Proposed Rulemaking,” Docket Nos. EP 755 and EP 665 (Sub-No. 2) (September 11, 2019).

[6] Kenneth D. Boyer, Jerry Ellig, José A. Gómez-Ibáñez, Anne V. Goodchild, Richard L. Schmalensee, Wesley L. Wilson, and Frank A. Wolak, “Public Interest Comment The Surface Transportation Board’s Notices of Proposed Rulemaking: Docket No. EP 755, Final Offer Rate Review, and Docket No. EP 756, Market Dominance Streamlined Approach,” October 17, 2019.

[7]  For an outline of how to conduct a regulatory impact analysis for those two proceedings, see Jerry Ellig, “Public Interest Comment on the Surface Transportation Board’s Proposed Rules: Market Dominance Streamlined Approach, Docket No. EP-756, Final Offer Rate Review Docket Nos. EP 755 and EP 665 (Sub-No. 2), and Solicitation of Information: Association of American Railroads – Petition for Rulemaking, Docket No. EP 752,” November 6, 2019, https://regulatorystudies.columbian.gwu.edu/stbs-market-dominance-and-final-offer-rate-review.