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Staggers Rail Act Turns 40

Mary Kennedy
By  Mary Kennedy , DTN Basis Analyst
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The Staggers Rail Act of 1980 is a U.S. federal law that deregulated the American railroad industry to a significant extent, replacing it with the regulatory structure that had existed since the Interstate Commerce Act of 1887. Pictured is a CP train moving through downtown St. Paul, Minnesota. (DTN photo by Mary Kennedy)

The Staggers Rail Act of 1980, a U.S. federal law that deregulated the American railroad industry to a significant extent, celebrated its 40th birthday last week. In this week's column, we'll look at the history of the law and its impact on the rail industry.

The Staggers Rail Act of 1980 was signed into law by President Jimmy Carter on Oct. 14, 1980, and implemented by the Interstate Commerce Commission (ICC, now the Surface Transportation Board (STB)). The STB is the successor agency to the Interstate Commerce Commission (ICC). Effective Jan. 1, 1996, the ICC was abolished pursuant to the ICC Termination Act of 1995 (ICCTA). Under ICCTA, many of the ICC's functions -- particularly regarding economic regulation of the freight rail industry -- were transferred to the newly established STB.

Prior to 1980, economic regulation prevented railroads from any flexibility in pricing needed to meet both intramodal as well as intermodal competition. Regulation also prohibited carriers from restructuring their systems, including abandoning redundant and light density lines, a necessity for controlling cost. Added to these problems was the industry's inability to cover inflation due to the regulatory time lag in rate adjustments. As a consequence, nine carriers were bankrupt, the industry had a low return on investment, was unable to raise capital and faced a steady decline in market share.

According to the Federal Railroad Administration, the U.S. freight railroads are private organizations that are responsible for their own maintenance and improvement projects. Compared with other major industries, they invest one of the highest percentages of revenues to maintain and add capacity to their system. The majority of this investment is for upkeep to ensure a state of good repair, while 15% to 20% of capital expenditures, on average, are used to enhance capacity. The seven Class I freight railroads are: BNSF Railway, Canadian National Railway (Grand Trunk Corporation), Canadian Pacific (Soo Line Corporation), CSX Transportation, Kansas City Southern Railway, Norfolk Southern Combined Railroad Subsidiaries and Union Pacific Railroad.…

In the 1980 Staggers legislation, many regulatory restraints on the railroad industry were removed, providing the industry increased flexibility to adjust their rates and tailor services to meet shipper needs and their own revenue requirements. Fast forward to September 2019 when the STB issued a Notice of Proposed Rulemaking (NPRM) to propose a new process for rail customers to contest the reasonableness of an individual rail rate. This proposal is known as FORR, final offer rate review.

According to the STB, the FORR procedure is designed to bring economy to the rate review process and provide complainants with smaller cases, who otherwise have been deterred from challenging a rate due to the cost of bringing a case under the STB's existing rate reasonableness methodologies, with a more accessible option. The proposed relief for cases brought under FORR would be subject to a two-year limit on rate prescriptions (unless the parties agree otherwise) with a proposed cap of $4 million. The cap is consistent with the potential relief afforded under the STB's existing methodology for smaller cases (known as Three-Benchmark).

But critics disagree with the proposal.

"Railroads serve shippers in a highly competitive market and set rates based on market conditions. FORR would allow rail customers to effectively set their own rates wholly independent of actual market conditions. The STB's proposal lacks standards for determining rate reasonableness and replaces the longstanding practice of careful deliberation with a single binary decision," said the American Association of Railroads (AAR) on their website.

"The STB's proposal is predicated on simply choosing between two proposed rates, neither of which is necessarily the maximum reasonable rate. The STB proposal abdicates the agency's responsibility to exercise its expert judgment and does a disservice to railroads and shippers by eliminating regulatory predictability," added AAR.

According to Freight Waves, pro-reform supporters contend that STB proposal smacks of the "regulatory creep" that threatens the Staggers Act's viability and could reverse the free-market norms that have made it a success.

During the Oct. 7 STB Rail Energy Transportation Advisory Committee virtual fall meeting, board member Marty Oberman highlighted what the STB has been working on this past year. "The most significant is the final offer rate review proposal," said Oberman. "If implemented, the goal is to constrain cost and time and complexity of a rate case. We expect this will receive its next action during the month of October. Stay tuned."

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