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Cash Market Moves             10/19 11:43

   Staggers Rail Act Turns 40

   The Staggers Rail Act, named for its sponsor, Rep. Harley O. Staggers, a 
West Virginia Democrat, just celebrated its 40th birthday.

Mary Kennedy
DTN Basis Analyst

   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."

   Mary Kennedy can be reached at mary.kennedy@dtn.com

   Follow her on Twitter @MaryCKenn

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