U.S. Freight Customers Increasingly Taxed by Higher Rail Rates

At a recent Congressional hearing, the Association of American Railroads (AAR) declared that rail rates after adjustment for inflation are 46 percent lower now than in 1981. If this is truly the case, why are so many rail customers voicing their concerns about the rising cost to ship by rail?

The answer is simple. Although rates did decline dramatically after 1980, this trend has long since reversed. AAR’s data show that from 2000 to 2017, real rates jumped 30 percent. The positive news from decades ago has little to do with the current reality and provides little relief to farmers, manufacturers, and energy producers facing rising costs today.

In 1980, Congress passed the Staggers Rail Act, landmark legislation that AAR credits with saving a railroad industry that was in complete disarray. The law stated that “competition and the demand for services” should drive rail transportation markets to help make railroads far more efficient and financially strong.

These reforms generated wide-ranging benefits. In the 1980s and 1990s, railroad operating costs dropped and volumes soared, boosting railroads’ profits. At the same time, rail customers benefitted from lower rates and a more efficient rail system.

Unfortunately, the benefits of these early reforms are no longer so widely shared. As shown below, real rates paid by shippers jumped dramatically after the turn of the 21st century. With rates up and costs relatively flat, railroad profits per ton-mile have nearly tripled. At the same time, rail volumes stopped expanding. In fact, railroads originated 3.4 million fewer carloads in 2017 than they did in 2006.

Source: Calculations based on data from Association of American Railroads’ Railroad Facts – 2018 Edition.

The railroad industry had consolidated from 40 major railroads to just seven by 2000. Furthermore, the four biggest railroads—two operating in the western U.S. and two in the East—now control more than 90 percent of rail traffic. As result, more than 75 percent of rail stations that pick up or receive freight are served by a single major railroad, leaving many customers with no competitive choice for rail service.

It is not surprising that the turning point for rates coincides with the start of the “Big Four” railroad era. Rather than growing rail volumes and competing for new business, railroads started to operate like a cartel, leveraging their hold over their customers to extract higher rates and shift costs onto the consumers they are supposed to serve. These disturbing trends signal both a market and policy failure with negative ramifications for U.S. economic growth and investment.

The Surface Transportation Board (STB) is responsible for implementing the Staggers Rail Act. Congress has charged STB with the responsibility of addressing freight rail issues while balancing the needs of the carriers and shippers. Unfortunately, some of the STB’s freight rail policies have not aged well.

Part of the problem stems from the fact that the STB established key rules in the 1980s when many railroads were struggling to survive. As a result, the Board focused on ensuring that carriers were able to earn “adequate revenues,” even if that meant limiting rail-to-rail competition. Given the financial strength of the railroads today, all such protections adopted to shield railroads from competing are no longer warranted. It is time for the STB to recognize the problems and conditions that exist today and give greater weight to the Staggers Act’s call for allowing “to the maximum extent possible, competition and the demand for services to establish reasonable rates.”

For example, the Staggers Act empowers the STB to grant “reciprocal switching,” allowing a shipper served by a single major railroad to have its freight switched to a second railroad at a nearby interchange. Unfortunately, the STB’s existing rules, adopted over 30 years ago, impose such high regulatory barriers that no rail customer has ever been able to successfully request such an arrangement. If the Board is serious about tackling rate and service issues as well as to adhering to its Congressional charge, then it must give more rail customers access to competitive service through reciprocal switching.

In addition, the Staggers Act calls on the STB to maintain “reasonable rates where there is an absence of effective competition.” Unfortunately, even STB members call the current rate review process overly complex, burdensome and illogical. The National Academies of Science, Engineering, and Medicine’s Transportation Research Board spelled out these issues in a 2015 report that concluded the STB’s methods for assessing rate reasonableness “lack a sound economic rationale and are unusable by most shippers.” The STB needs to fix these well-known problems by adopting a more streamlined and sound rate review process.

The Board finds itself at an important juncture that demands action to move its policies and the nation’s freight rail system into the next century. The STB only needs to follow the direction and use the authority granted by the Staggers Act.

Although the railroads argue for the status quo, the STB has a legal obligation to ensure that competition, rather than monopoly power, is driving rail markets. To meet this obligation, the STB must adopt meaningful reforms that will remove barriers to competition and streamline burdensome policies.

There is good news: The STB is rethinking its approach to rate oversight. A new report prepared by the STB’s Rate Review Task Force recognizes the dramatic improvement in the financial health of the railroad industry and the growing market power the railroads have over their customers. Instead of just suggesting tweaks to the existing rate case procedures, the Task Force provides thoughtful recommendations for alternative approaches that could be more useful both large and small shippers.

For the sake of rail customers and the public, let us hope much-needed reforms are finally on the way.

Martha Moore is Senior Director of Economics & Policy Analysis at the American Chemistry Council.