Modernizing Freight Rail Regulation:Recommendations from the TRB Study*

Jerry Ellig, Ph.DSenior Research FellowMercatus Center at George Mason University

*The speaker served on the committee that produced the TRB report, but unless otherwise indicated, opinions and conclusions in this presentation are solely those of the speaker.

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Staggers Act’s partial deregulation

• Deregulated most rates• Legalized confidential contracting• Liberalized abandonment of unprofitable

lines• Time limits for merger decisions under

“public interest” standard• Ended “open routing”

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Staggers Act’s effects

Figures in $1998. Source: Jerry Ellig, “Railroad Deregulation and Consumer Welfare,” Journal of Regulatory Economics 21:2 (2002)

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More recent rate trends

Source: Transportation Research Board, Modernizing Freight Rail Regulation (2015), p. 55.

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Lingering controversies• Maximum rate regulation

• Mandated switching

• Revenue adequacy

• Service complaints

• Merger approval

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Current rate regulation

• Rate exceeds 180% of “variable cost”

• Absence of effective transportation competition

• Rate exceeds “stand-alone cost”-- or one of several simpler

benchmarks

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Problem: Cost allocation is arbitrary

180% R/VC thresholds under different cost allocation rules

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Percent of ton-miles priced <100% R/VC

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2001-02 2003-04 2005-06 2007 2008 20120

5

10

15

20

25

30

35

40

Percen

t

Problems beyond cost allocation• Geographic/product competition

included, then excluded

• Shipper cost of bringing a case– Full SAC: $5.8 million– Simplified SAC: $4 million– 3 Benchmark: $250,000

($4 million cap on rate relief)

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Proposal: Rate benchmarking• Use rates from competitive markets to

estimate how shipment characteristics affect rates

• Use this model to predict rate based on shipment characteristics

• Actual rates exceeding predicted competitive rate by some multiple qualify for arbitration

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Example: Chemicals

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Arbitration• Arbitrator determines market

dominance

• Strict time limit

• No limit on types of evidence

• Final-offer arbitration if market dominance is found

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Mandated switching

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Other issues

• Revenue adequacy

• Service complaints

• Merger approval

• Review of data gathering

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To get the full report …

http://www.trb.org/Main/Blurbs/172736.aspx

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