Big Picture: 

The United States has an extensive freight rail system, which transports 40 percent of American long-distance shipping volume and, being capable of moving goods in bulk relatively cheaply, has become vital to U.S. companies, or “shippers.” However, between 1980 and the early 2000s, the U.S. freight rail industry underwent deregulation and consolidation, with a handful freight operators owning most railroads and dominating the market. This led certain businesses, or “captive shippers,” to rely on single freight rails that don’t have much competition.

Operative Definitions: 

1. The Staggers Act: Congressional act passed in 1980 that deregulated much of the U.S. railroad industry, allowing differential pricing, confidential contracts as well as more profit-oriented practices.
2. Surface Transportation Board (STB): Formerly the Interstate Commerce Commission (ICC), an independent federal agency that regulates modes of “surface transportation,” primarily freight rail.
3. Captive shipper: An STB term that describes any goods shipper–such as an agricultural company that wants to transport its grains to an outgoing port–that has to depend on a single railroad without economic alternatives like a competing railroad or trucks.
4. Stand-Alone Cost (SAC) Test: A test proposed and overseen by the STB to compensate captive shippers. Under this rule, if a shipper can design a hypothetical stand-alone railroad that serves them exclusively and operates at a cost lower than the “captor” railroad, the railroad is deemed to have overcharged, and the shipper is entitled to rate relief. 
5. The Bottleneck Problem: A “bottleneck” is defined as a railroad segment owned by a single monopolistic operator. The problem is, under existing regulations, the operator is not required to connect its customers to a competing line at a fair fee. For example, if two railroads run parallel from A to B, but only one of them continues on to C (creating a bottleneck BC), this line can charge shippers going from A to C (and not just from B to C) at a higher price as if the entire line is without competition.

Important Facts and Statistics:

1. Freight rail accounts for 40 percent of all long-distance U.S. shipping volume and transporting ⅓ of U.S. exports.
2. There were about 30 freight rail carriers in the U.S. when the Staggers Act was passed in 1980. Now there are seven, four of which control 90 percent of American rail traffic.
3. According to the American Fuel & Petrochemical Association (AFPA), 78 percent of all freight rail customers are only served by one railroad. By 2019, half of U.S. railroad revenue was generated by captive shippers, more than doubling 2004’s 27 percent.
4. According to an STB estimate, a comprehensive SAC test simulation can cost up to $5 million in litigation, and a “Simplified SAC” test will still likely cost $1 million due to the inherent complexity of railroad organization. The complainants, i.e. captive shippers, bear the burden of proof and running the test.

Five-Point Plan:

(1) Adopt case-by-case reciprocal switching to solve the Bottleneck Problem. Reciprocal switching is the practice when a captive shipper can request that their shipping be transferred to a competing railroad at the first junction where it becomes available, thus reducing the dominance of bottleneck holders. Currently, railroads use reciprocal switching voluntarily, with mandatory adoption only when anti-competitive practice can be proved by captive shippers, which can be difficult. However, the Libertarian Reason Foundation argues that full-scale mandatory reciprocal switching can significantly raise logistics complexity and actually reduce efficiency. As a result, it is optimal to exercise caution and promote the adoption of reciprocal switching on a case-by-case and line-by-line basis.

(2) Limit time frames of “paper barrier” contracts. It is common practice in the railroad industry for a major company to sell some of its more marginal and smaller-in-scale lines to local “startup” railroads. It is also common for these sale or leasing contracts to demand that these shorter lines hand over all their interstate cargoes exclusively to parent companies, creating “paper barriers” that restrict their bargaining powers. The STB should  put a mandatory time limit on such barriers, after which they are automatically lifted to allow for local competition between national and local lines. A cap at three to five years has been suggested. 

(3) Strengthen STB’s authority to enforce competitive access between different freight lines. Competitive access refers to a railroad sharing its terminal or interchange facilities with other railroads at a fair price, but sometimes railroads will choose to deny such access or charge higher fees to prevent access by direct competitors. An ICC ruling in the 1980s largely restricted its and the STB’s power to intervene in such cases, only permitting it when such action is “in the public interest,” a relatively high bar that requires proof of “monopoly abuse.” Removing or lowering this bar can effectively augment STB power in punishing access-denying practices.

(4) Streamline and simplify the dispute process. Customers of U.S. freight rails complain the current dispute resolution system at the STB is “insufficient, cumbersome and takes far too much time” (AFPA, 2022), which disproportionately harms the shippers who have to continue using the railroads during the dispute. A simpler, expedited process, combined with the development of a cheaper-than-SAC test, should encourage captive shippers to bring forward more complaints that better foster competition.

(5) Expand the categories of freight rail performance metrics that should be reported to the STB. The reporting of U.S. rail performance data has been made permanent by the STB in 2016, but customers and experts indicate that some problems remain. AFPA complains that not enough data is collected on the first and last miles of shipping, which is vital to identifying and fixing service issues. Theodore Prince, an industry insider, also claims that existing metrics fail to help intermodal shipping, when goods have to transfer between different modes of transportation like trucks and freight trains. Five supplementary sets of metrics are proposed: initiation of intermodal shipments, en-route rail movement, destination terminal performance, terminal health and overall system health.

Why This Initiative is Important:

In the freight rail industry, a balance must be struck between fair competition and efficiency, which don’t always go hand in hand because it has some features of a natural monopoly. For example, compared to each railroad having its own facility at a port, having one single, shared terminal will be considerably cheaper and more efficient. Nevertheless, the current state of U.S. freight rail is leaning too much towards regional monopoly so that business shippers are being hurt and disadvantaged. The measures proposed above should be able to curb some of the industry’s most common unfair practices and bring about said competition-efficiency equilibrium.

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