STB to Review Competition in the Railroad IndustryErica Venancio posted on 11/14/2008

The U.S. Surface Transportation Board met Nov. 6 to discuss an independent study assessing the current state of competition in the freight railroad industry. The study findings included the following:

• Class I railroads’ rates (real revenue per ton-mile) rose substantially above short-run marginal cost in 2006.
• Economies of density and fixed costs require railroad pricing above short-run marginal cost to achieve revenue sufficiency.
• For most years in the 1987 to 2006 period of the study, the Class I railroad industry does not appear to be earning above normal profit.
• The increase in railroad rates experienced in recent years is the result of declining productivity growth and increased costs rather than the increased exercise of market power.
• Railroads use differential pricing to recover their total costs.
• Different commodity groups face different markups of railroad rates over marginal costs.
• Within commodity groups, shippers with no or very limited transportation options tend to pay higher rates than shippers with the same shipment characteristics who enjoy more or better transportation alternatives.
• The ratio of revenue to URCS variable cost (R/VC) is weakly correlated with market structure factors that affect shipper “captivity,” and is not a reliable indicator of market dominance.
• Capacity “tightness” is primarily due to congestion at terminals or other specific network locations. Terminal congestion in the 2003-2005 period was linked to service performance declines during that time period.
• Current market circumstances imply that providing significant rate relief to certain groups of shippers will likely result in rate increases for other shippers or threaten railroad financial viability.
• Incremental policies such as reciprocal switching and terminal agreements have a greater likelihood of resolving shipper Executive Summary ES-6 concerns via competitive response, and have a lower risk of leading to adverse changes in industry structure, costs, and operations.
• Some shippers will not benefit from efforts to enhance railroad competition, implying the necessity of continued regulatory oversight.