img Explainer

Freight Rail and the Stand-Alone-Cost Test
ONC Editorial

Jun 15, 2023

This Explainer discusses the lack of competition within the freight rail industry and the current plight of "captive shippers" amid the adoption of a Stand-Alone-Cost test. (The opinions expressed in this article are those of the individual author, whose information can be found below.)

The extensive U.S. railroad network, combined with its ability to move goods in bulk efficiently, makes freight rail the optimal choice for domestic shipping. However, many businesses complain about freight rail’s lack of competition, giving operators ample incentive and ability to raise shipping rates to the disadvantage of customers.

The Staggers Act of 1980 significantly deregulated freight railroads, helping improve efficiency and reduce costs by nearly half. Nevertheless, deregulation also encouraged consolidation in the 2000s, and the number of carriers dropped from 30 to 7, with the most powerful four controlling 90% of total traffic. Rates also bounced back,–rising 43% since 2004–propping up operational costs for business owners who depend on railroad transportation.

The most vulnerable businesses include “captive shippers,” who are economically compelled to use one railroad due to lack of alternatives. Almost half of railroad revenue comes from them, but they have little leverage in rate negotiations. In defending captive shippers, the government adopted the “stand-alone-cost (SAC) test,” modeling a hypothetical railroad serving the same route on a smaller scale at optimal efficiency.

The operational costs of this imaginary railroad, plus a reasonable investment return, are set as the maximum rates that captive shippers can charge. However, the burden of such costly evaluations falls on captive shippers, who face information asymmetry and a poorly defined set of technical guidelines. Therefore, several industries are calling for further freight rail reforms. 

To see all sources consulted and/or to learn more about the author, Zhengmao Sheng, click here.

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