Freight Rail Policy Stance: Railroads set their prices according to market forces. The use of differential pricing by railroads — like other private businesses — has revitalized U.S. freight railroads and benefited U.S. businesses and the economy. Proposals like forced access and revenue adequacy that seek to curb railroads’ use of differential pricing threaten continued investment in and viability of the freight rail network.
Why This Matters: Economic deregulation and the allowance of differential pricing by the Staggers Act of 1980 has benefited railroads and shippers alike. Enabling railroads to price their services to better compete with competitors allows railroads to expand their customer base and earn the revenue required to sustain the world-class rail network. Shipper efforts to curb railroad use of differential pricing would threaten continued investment and reverse decades of progress for U.S. freight railroads.
What is Differential Pricing?
Demand-based differential pricing — or “Ramsey” pricing — is based on the economic principle that some customers are willing to pay more than others for the same service. Differential pricing allows railroads to offer lower rates to customers who have alternative transportation options by charging higher rates to customers with fewer competitive options. The use of differential pricing ensures that railroads can effectively compete against other modes for customers and earn adequate revenue to maintain their world-class infrastructure.
Differential Pricing Background
Allowing railroads to enter into confidential contracts and charge rates based on demand — like other businesses — was a hallmark of the Staggers Rail Act, a law that partially deregulated the U.S. freight railroad industry in 1980. Prior to the Staggers Act, railroads would publicly post a rate for commodities and everyone would pay that rate. Under that system, railroads routinely lost customers, because they were unable to lower rates when competing for customers against trucks or barges. Allowing railroads to price their services based on demand, has enabled them to grow their customers base and distribute costs across that base while earning the revenue required to adequately invest in their infrastructure.
For those customers who have access to a single railroad or have fewer competitive options — known as “singly-served customers” — the Staggers Rail Act instituted a rate review process at the Surface Transportation Board, the regulatory agency with oversight over railroad economic issues. Shippers can use one of three tests — The Stand Alone Cost Test (SAC), Simplified SAC and Three Benchmark — to prove that their rate is unreasonable. Since 1996, when the STB was created, rail customers have brought 51 rate cases to the Board. Of those, shippers have won 12, railroads have won 11, and 28 have reached voluntary settlement or been withdrawn.
In the years since passage of the Staggers Act, America’s privately owned freight rail industry has been revitalized thanks, in large part, to its ability to utilize differential pricing. Since 1980, railroads have invested more than $685 billion into their privately owned networks and shippers pay 45% lower rates, on average, than before deregulation.
Why it Matters Today
Despite the enormous progress railroads have made in the years since deregulation, some rail shippers consistently advocate for legislative and regulatory tools to artificially lower the price they pay for rail service. They have floated numerous proposals that run counter to the very free market system that was instituted as part of the Staggers Act and serves as a cornerstone of the U.S. economy.
Helpful to Know
In a proposal from the STB, the agency that oversees freight railroad economic regulations, railroads could be forced to turn over their traffic to competing railroads at potentially below-market rates to service shipping customers.
Railroad revenue adequacy is a calculation used by the STB to assess the financial health of individual railroads. The proposed application of revenue adequacy to rail rate cases has the potential to threaten continued investment in and viability of the U.S. freight rail industry.
Forced government intervention into railroad operations and pricing would risk upending a carefully calibrated system that has enabled decades of unparalleled private infrastructure investment and made the U.S. rail network the envy of the world while ensuring U.S. businesses remain competitive in the global economy.