A new report recommends an overhaul to the way U.S. railroad prices are determined, adding that the old formula used to decide the cost of shipping by rail simply doesn't work in today's day and age.
The study from the National Research Council's Transportation Research Board (TRB) found that reforms are needed because, The Staggers Act of 1980 – while an effective piece of legislation at the time – has not aged well and is outdated in today's transportation industry. When the act was passed, the rail industry had become stagnant. The legislation removed regulations hindering operations and subsequently fueled development and innovation in the rail industry. However, now, 35 years later, the report explained that more change is needed.
Shippers don't believe rail service they receive is worth what they pay
Since 2000, rail shipping rates have risen faster than inflation, and the quick-increasing costs, shippers believe, don't reflect the level of service being provided. Because of this, many shippers have lauded the report suggesting an overhaul. For some time, they have made their case that there has been a disconnect between the poor service they receive and the high prices they are charged to move goods. The Staggers Act did offer shippers the ability to challenge rates that are too high, but the TRB report noted that the option offered through the legislation isn't good enough.
"The formula used to identify unusually high rates that can be challenged is arbitrary and unreliable," it explained.
"Since 2000, rail shipping rates have risen faster than inflation."
The report recommended developing a new formula that compares supposedly unfair rates with those in competitive markets. A repeal of the equation currently used would require congressional action. An updated formula would allow the Surface Transportation Board (STB), the agency that regulates railroads, to act more quickly in resolving disputes. Adjudication methods used to solve rate disagreements are often very costly and can take years to produce a conclusion. The committee that wrote the TRB report recommended STB hearings currently used to solve rate disputes be replaced with independent arbitration hearings designed for quicker resolutions.
The report also suggested allowing shippers who pursue rate arbitration to float a different option as a solution. Specifically, the committee wrote that shippers should be permitted to propose reciprocal switching. This is the process of switching freight at rail interchanges owned by rival railroads.
Railroad industry groups express their opposition
Despite the general sigh of relief let out by shippers who finally have independent proof of the rate issues they've been speaking about, rail organizations are less than pleased with the recommendations made in the TRB report.
"Whether it's a proposal to force binding arbitration or create artificial formula-based rate review processes, these proposals are nothing more than further attempts by certain shipper groups to use the federal government to get themselves below-market rates," said Timothy Strafford, the Association of American Railroads' (AAR) associate general counsel.
If the reforms recommended by the committee were implemented, they would ultimately hurt rail shippers, Edward Hamberger, president and CEO of the Association of American Railroads, told the Journal of Commerce (JOC). If the rail industry were overhauled under the TRB suggestions, railroads' ability to invest in their networks would be hindered. He noted that this would crimp reliability and bring production down to pre-Stagger Act levels.
"The United States already enjoys the most efficient, safest freight rail network in the world," Hamberger explained to the JOC. "The report is a theoretical exercise that would upend the real world concrete successes achieved since the Staggers Act."
The railroad industry has been under scrutiny, with a recently proposed bill aimed at boosting competition and making service more effective. The "Rail Shipper Fairness Act of 2015" would also strengthen the STB. The legislation would expand the breadth of fines that railroads would be subject to for poor service, allow rate challenges two years ahead of an expected shipment and place the collection of rate increases on hold while a case is pending.