The Staggers Rail Act of 1980 partially deregulated the freight rail system, relying on market competition to replace prescriptive government regulation. Congress understood that the Interstate Commerce Commission (ICC) was needed to protect rail-dependent shippers that do not have the benefit of market competition.
Over 30 years later, the STB has allowed the major freight railroads to consolidate their market power even while failing to protect rail-dependent shippers from excessive rates and poor service. The more than 40 railroads in existence in 1980 have consolidated into four major railroads that are responsible for 90% of the nation’s rail traffic, effectively dividing the country into their own regional monopolies.
A 2012 study found that 78% of the 28,000 places in the continental United States where major railroads pick up or deliver freight are served by a single major railroad. Unless rail customers in those locations can use a truck or water transportation, they are left without access to transportation competition and face “take it or leave it” rail prices. In fact, since 2004 – through one of the nation’s worst economic periods – freight rail rates for rail-dependent shippers have increased two and a half times the rate of inflation and two and a half times the level of truck rates.
Today, rail-dependent shippers are left with no market competition and an unworkable regulatory system.
The stated purpose of the Staggers Act was to “maintain reasonable rates where there is an absence of competition and where rail rates provide revenues which exceed the amount necessary to maintain the rail system to attract capital,” to “prohibit predatory pricing and practices” and “to avoid undue concentrations of market power.” Guaranteeing competition for rail shippers, either through the nation’s antitrust law or by action of the Surface Transportation Board (which replaced the ICC in 1996) or both, would ensure that shippers and the consumers they serve will finally begin to enjoy the benefits of a deregulated freight rail system.
Staggers in the 1980s
The Staggers Rail Act sought to give new life to the railroad industry while still protecting captive rail customers from unreasonable rates and practices. The ICC, now the Surface Transportation Board, was given the mission of protecting captive rail customers. But the STB has not been doing its job.
During the 1980s, the ICC adopted a rate challenge process that has proven burdensome, expensive, and unworkable; allowed rail consolidations and track abandonment; and even allowed rail practices that actually expanded their monopoly power.
Further non-competitive practices emerged during the 1980s when the railroads began transferring routes to short line and regional railroads. The ICC and the STB consistently approved the creation of short-line railroads that were allowed to lease track from major railroads but only on the condition that they delivered and received traffic from only that railroad. Because these restrictive conditions were contained in proprietary documents, these secret “tie-in” agreements, also called “paper barriers,” were not revealed until several years ago.
Rail Monopolies in the 1990s
In 1995, Congress abolished the ICC and established an independent Surface Transportation Board within the Department of Transportation. The STB was charged with reviewing all railroad mergers, rates and services, but has done little to restrain the industry’s monopolistic practices.
The STB has consistently ruled in favor of the railroads. In December 1996, in what is now known as the “bottleneck” decision, the STB ruled that railroads have the right to deny their captive customers access to a competing railroad. Astoundingly, the STB ruled that a railroad could refuse to provide its customers a rate to a point of rail competition, thus defeating the very idea of competition.
Consolidation among the nation’s railroads has worsened the problem. Only seven major freight railroads operate in the United States today, compared to 40 in 1980. Four of these companies are responsible for more than 90 percent of the rail traffic in the country and receive more than 95 percent of the freight rail revenue generated annually.
Service Issues at the Turn of the Century
Industry consolidation and downsizing has caused cyclical delays and inadequate service for rail customers. A series of derailments in 2005 dramatically delayed coal shipments from one of the nation’s most important coal producing regions, causing fuel supplies at coal-fired power plants to fall to dangerous levels in both 2005 and 2006. Some utilities have been forced to import coal from as far away as Indonesia, while many have been forced to use costlier natural gas to generate power or buy high-priced replacement electricity generated by natural gas.
The Staggers Rail Act of 1980 deregulated competitive rail service and has made it easier for the railroad industry to consolidate and downsize their systems. The agencies implementing the Staggers Act, first the ICC and now the STB, have gone too far, effectively deregulating non-competitive rail service. This has allowed both the growth of a non-competitive rail industry and the downsizing of the rail industry to the point that the rail system today does not have the capacity to serve the nation’s transportation needs.
The idea behind the Staggers Act was that a financially strong rail industry, released from most government supervision, would result in a competitive, viable rail system that provides reliable service at reasonable rates. The reality, 25 years later, is that the consolidated rail industry is earning record profits while failing to provide reliable service to America’s rail shippers at reasonable rates. There is considerable doubt today that a continuation of current federal rail policy will result in an adequate and reasonably priced rail system.