As the world economy has evolved, North American railroads have evolved along with it, continuously building the network of the future to ensure the U.S. economy and businesses remain competitive.
America’s freight railroads — which are overwhelmingly privately-owned — spend billions of dollars annually on infrastructure, equipment and technology, allowing American freight rail to thrive as the safest, most efficient and cost effective rail network in the world.
- Recent years have been the safest ever for the rail industry.
- The average rail shipper can move nearly twice as much freight for about the same price it paid more than 35 years ago.
- In 2017 alone, Class I railroads generated $219.5 billion in economic output and supported more than 1.1 million jobs across the country.
The STB holds the pen for the next chapter.
Although the industry was partially deregulated in 1980 — which let railroads to operate like other businesses in a free market — the Surface Transportation Board (STB) today maintains economic oversight of the industry and adjudicates and mediates some disputes between railroads and their customers. In this position, the STB has a unique opportunity to ensure freight rail remains the backbone of our national economy by maintaining regulations that allow railroads to invest back into their network.
Recently, the STB’s Rate Reform Task Force (RRTF) released a report recommending how to improve the STB’s rate review processes. AAR believes that the STB can successfully streamline how rate reasonableness disputes are handled — especially for small shippers — without implementing regulations that would rewrite freight rail’s success story. As reflected in our letter to the STB in response to the RRTF report, we offer multiple suggestions:
- Regulate only in instances of market failure. The STB is mandated to engage in evidence-based analysis to determine a market failure, as well as a failure of existing regulations, before it can regulate. Only if actual evidence supports that conclusion should the STB consider a regulatory response. Acting without such evidence, and instead leaping to new regulations, risks the health and stability of the rail network.
- Assess why shippers are not using current simplified rate case methods. The STB has spent large amounts of time to simplify the complexity and costs of rate case methodologies. Before coming up with another solution, the STB should speak directly to shippers to understand their concerns and see why they are not using the two simplified rate case methods of “Simplified SAC” and “Three Benchmark rule.”
- Base recommendations on proven, fundamental economic principles. Proposals for wholesale changes to existing methodologies and new alternatives were based on little or no factual data and completely ignored the STB’s own report, which found that research does not point to a simpler methodology than the STB’s current rate reasonableness tests. In fact, the report noted that further simplification would undermine the effectiveness of those tests. Any proposals to change the current tests need to be based on analysis and sound economic principals.
- Do not cap rates based on revenue adequacy. To assess the financial health of individual railroads, the STB uses its revenue adequacy calculation, which measures whether the return an individual railroad earned was sufficient to attract investment capital. Railroad revenue adequacy is a Congressional goal that the STB must view as a floor, not a ceiling. However, the report proposes restraining railroads from earning more than its cost of capital, which as many economists have warned, would be less incentivized to expand capacity, pursue cost-saving innovations or respond to market opportunities.
- Perform required analysis of market dominance. Railroads operate in competitive markets for transportation services. The STB is legally required to make an affirmative finding that the transportation to which a challenged rate applies lacks effective competition before it can judge the reasonableness of a given rate. Undercutting the core legal principle of market dominance will not help improve rate case process and procedure.