The statement of task directs the committee to address six queries in addition to the four task items stipulated by Congress for this study. This appendix offers a brief response to each query and cites sections of the report in which more supporting information can be found.
(a) Examine rates and service levels by type of shipper and commodity, service lane, shipper size, and shipper type.
Chapter 2 presents trends and patterns in real rates for 2000 to 2013 derived from the Surface Transportation Board’s (STB’s) confidential Carload Waybill Sample (CWS). Rate trends are examined industrywide, for several major commodity categories, and for common and contract carriage. CWS records are not specific to individual shippers, and hence examination of rates by shipper size was not possible. In addition, rates were not examined at the level of specific shipping lanes because regulations prohibit releasing confidential CWS revenue data for specific routings or origin–destination points. The industrywide and commodity-specific rate trends are compared with trends in the productivity-adjusted Railroad Cost Adjustment Factor, an index of input costs per unit of railroad output. Findings on rate trends as they relate to trends in input costs are summarized in Chapters 2 and 5. In Appendix B, a methodology for identifying unusually high common carrier (tariff) rates on the basis of comparisons with rates for similar shipments in more competitive markets, including shipments moved in contract carriage, is developed and demonstrated. The report recommends that such empirically based methods be used to identify rates that can be challenged according to the maximum rate protections and that such methods replace current methods relying on arbitrary cost allocations.
Freight rail service performance cannot be examined in the same quantitative manner as rates. The review of service quality in Chapter 2
was largely limited to a survey of recent shipper complaints. Most concerned the inadequacies of railroads in meeting their common carrier service obligation, particularly during periods of tight capacity caused by high demand and episodes of severe weather. Data at the shipment-specific level are not available for assessing whether shippers using common carriage regularly receive service inferior to that of shippers using contract carriage or whether common carrier service levels are more likely to suffer when capacity is tight. The recommendation that STB begin collecting shipment-specific data to monitor rail service performance on a more regular, detailed, and systematic basis appears in Chapter 5.
(b) Estimate whether railroad exercise of market power has increased since deregulation and the impact this has had on rates and/or service.
As explained in the report at various points, including Chapter 1, the Staggers Rail Act’s legalization of private contracting, pricing freedoms, and effective elimination of open routing have all contributed to the ability of railroads to obtain and exercise market power. Railroads must be able to charge rates that exceed marginal costs, and thus to exercise market power, for at least some portions of their traffic if they are to recoup their large overhead, or common, costs. Whether the scope and intensity of local market power exercised by railroads has been growing in recent years, or whether it has grown beyond the point needed for railroads to pay for their common costs (i.e., to continue to attract capital), cannot be established from examinations of the revenue-to-variable-cost formula that is used by STB for such purposes. As explained in Chapter 3, the revenue-to-variable-cost formula is based on a faulty premise. A railroad’s common costs cannot be divided and allocated to individual segments of traffic in an economically valid way, as is assumed by the formula, or with results that offer insight into the pricing of traffic and a railroad’s exercise of market power. For reasons given in Chapter 4, STB’s annual pass/fail determinations of railroad’s revenue adequacy on a firmwide basis provide little insight into whether railroads have been earning above-normal profits that suggest an ability to exploit market power.
The examination of rate trends in Chapter 2 shows that rates have grown faster than input costs since the early 2000s. This divergence could partly be the result of increased exercise of market power. However, the committee is unaware of any structural change in the industry that would have produced a significant increase in market power after 2000. For example, there were no major mergers, nor was there any apparent diminution of competition from trucks or barges. The divergence may also result from the use of congestion pricing by the railroads to manage traffic under capacity constraints. As explained in Chapter 2, congestion may continue in some locations even if a railroad makes all economically justified capacity investments. The cost of capacity expansion to relieve the congestion may exceed the marginal revenue that the railroad derives from congestion reduction. Alternatively, the divergence in rates and input costs may simply reflect a change in the mix of traffic, including more high-margin traffic. The committee did not attempt to distinguish between alternative explanations of recent rate trends relative to trends in input costs.
(c) Describe the potential role that freight rail can serve in shifting some future growth in highway freight shipments to rail.
Chapter 2 references studies of future freight capacity needs by the American Association of State Highway and Transportation Officials, the National Surface Transportation Policy and Revenue Study Commission, and the Association of American Railroads. Each study concluded that increasing the railroads’ share of freight transportation could confer public benefits, including reductions in highway congestion and emissions, through the diversion of freight from trucks. Existing government programs designed to make freight rail more attractive to shippers who would otherwise use highways and to make such freight more profitable for railroads to move are cited in the chapter. Some of the programs have lowered the cost of capital for investment by railroads in the capacity to handle more truck-competitive freight. However, the existence of alternatives for achieving these outcomes, including higher road use pricing and pollution charges, is noted in the chapter. This study did not examine the alternatives or whether the current approach is justified. Such an examination would have required
(d) Comment on the role freight rail can serve in meeting the Department of Transportation’s strategic goals.
According to the strategic plan of the U.S. Department of Transportation (2014, 13), the department’s strategic goals are safety (reduce transportation-related casualties), state of good repair (ensure maintenance of infrastructure in good repair), economic competitiveness (promote policies and investments that bring economic benefits), quality of life in communities (coordinate transportation policy with housing and development policy), and environmental sustainability (reduce harmful emissions and oil dependence). This study could not possibly examine the rail freight sector with such broad goals in mind. The report examines the economic regulation of freight railroads. It offers recommendations for federal actions that, if implemented, will maintain the economic efficiency and financial health of the freight rail system while providing more effectively for fair treatment of shippers. Such outcomes would be consistent with strategic goals such as economic competitiveness and maintenance of good repair. The committee did not evaluate the safety, environmental, or other community impacts of its recommendations. It believes that maintaining an efficient and financially sound rail system would be consistent with these strategic goals.
(e) Assess whether Class I freight railroads are earning their cost of capital.
As the report describes in Chapters 1 and 2, the freight railroads have access to credit markets, as is demonstrated by their substantial investments in capacity. This observation alone strongly suggests that railroads are earning their cost of capital. As noted above (and for reasons explained in Chapter 4), the committee finds that STB’s annual appraisal of the revenue adequacy of each Class I railroad does not provide meaningful information about the industry’s earnings or profitability levels. Consideration of the railroad industry’s profitability levels over the extended period of a business cycle and comparisons with
the ranges of profitability observed in other industries would be more relevant. Therefore, the report recommends that the statutory requirement for an annual revenue adequacy determination be repealed and replaced with a requirement for periodic (e.g., 5- to 10-year) assessments of industrywide economic performance, competitive conditions, and rate and service levels. The committee is also mindful of the fact that revenue adequacy calculations in other regulated industries have often been made within the context of rate-of-return regulation. This form of regulation has never been used in the U.S. railroad industry and has had a mixed record when it has been used, as noted in Chapter 3.
(f) Assess whether railroads continue to be a decreasing cost industry due to economies of density or whether average and marginal costs are rising and the implications the latter has for STB oversight and regulation.
This report does not examine whether the railroads have exhausted or nearly exhausted all economies of density, and by implication, whether railroads should continue to be allowed to engage in differential pricing. Given the complexity of network economics and the dominance of common costs in railroad operations, the committee recognized the difficulty of undertaking such assessments and did not attempt to do so. A characteristic of operating near capacity is that the marginal cost (including congestion elements) will rise with traffic levels. While the assumption that marginal costs are rising with traffic levels for well-defined movements is logical, the committee is unaware of any studies that have attempted to answer this question more generally. The fundamental economics of railroad networks have not changed. Even if marginal costs are now rising, they can be expected to decline again with increases in output when capacity is expanded.
U.S. Department of Transportation. 2014. Transportation for a New Generation: Strategic Plan, Fiscal Years 2014–2018.