Source: https://www.freightwaves.com/

On Oct. 14, 1980, President Jimmy Carter affixed pen to paper and put nearly a century of U.S. railroad history permanently out to pasture.

The Staggers Rail Act, named for its sponsor, Rep. Harley O. Staggers, a West Virginia Democrat, ended much of the 93 years of federal railroad regulation. The act drastically diminished the influence of the Interstate Commerce Commission (ICC), which had been established in 1887 to oversee the railroads and curb their abuse of market power. It sent a wake-up call to the then-powerful agency to adopt a free-market approach to addressing the future needs of the rail ecosystem, not the least in the ICC’s evaluation of rail mergers and acquisitions. 

Under the act, a railroad could set rates on any lane without government approval, unless the ICC determined the railroad had no effective competition on that lane. Rates could move within a wide range, though the ICC maintained its authority to rule on shipper complaints that a rate had fallen within an “unreasonable” zone. Staggers allowed railroads and shippers to negotiate confidential service contracts without agency review unless the pact interfered with a carrier’s mandate to provide common carrier service. 

Railroads could abandon unprofitable trackage without prior regulatory approval, a move that spawned a robust short line railroad industry that dramatically benefited rail users. The practice of collective rate-making, in which railroad executives collaborated to set shipper rates, would be phased out.

The Staggers Act, combined with the Motor Carrier Act signed into law that July, planted the seeds of what would become the present-day transportation industry. For example, fast and efficient intermodal service that stakeholders take for granted would not have been possible without the aggregate reforms embedded in the two laws. In a webinar earlier this week, Clifford Winston, Searle Freedom Trust senior fellow at The Brookings Institution, said the transportation industry’s rapid and effective response to the COVID-19 pandemic would have been unthinkable in a regulated environment.

Staggers has not been a zero-sum game. As carriers became more efficient and reinvested cost savings into their physical plants, rail shippers reaped the benefits of lower rates and better service. Shippers’ fears that deregulation would allow avaricious railroads to run roughshod over them never materialized. The ICC, meanwhile, became a bit player on the daily stage. The nation’s oldest regulatory agency, it was sunset in 1995.

Supporters have no shortage of data points to quantify the Staggers Act’s economic benefits. But one championed by the trade group Association of American Railroads (AAR) stands out: Average rail rates, measured by inflation-adjusted revenue per ton-mile, are 43% lower today than they were in 1981. This means the typical shipper can tender more freight for around the same price it paid nearly 40 years ago, according to the AAR.

Staggers “truly revitalized the railroad industry,” said Jim Blaze, a veteran rail consultant and author who writes a weekly column for FreightWaves.

Backsliding fears

Four decades on, however, the Staggers Act faces a backlash from critics that lump the railroads with Big Tech and other sectors with allegedly anti-competitive actions that have taken their market dominance positions too far. Heavy sectoral regulation is back in vogue, pro-reformers warn. The rail industry points to what the AAR has called “regulatory creep” at the Surface Transportation Board (STB), the ICC’s successor agency. Some of that began during the Obama administration, an era of aggressive regulatory involvement across several transport subsectors. 

Currently, much of the focus is on a September 2019 STB rulemaking that would set new guidelines for contesting the reasonableness of an individual rate. The proposal, known as “final offer rate review” (FORR), would require a shipper and carrier to present their cases before the agency based on their own methodologies and without STB input, critics contend.

Under FORR, the STB could choose a shipper’s rate simply because it is perceived to be more reasonable than the carrier’s, according to AAR. The process is akin to “final offer arbitration” more appropriate for major league baseball salary disputes rather than to determine a proper rate in a complex, dynamic world of rail economics, AAR has said.

Shippers would be free to set their own rates “wholly independent” of market conditions that have long been the basis for rail rate-setting, AAR has argued. The trade group said the STB’s proposal deprived railroads and shippers of their due process and statutory rights to a full hearing, the modus operandi practice in ruling on rate reasonableness disputes.

The 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, pro-reform supporters contend. Any form of reregulation “would be a tragic mistake that the country would literally pay for in slower economic growth,” said James H. Burnley IV, who served as secretary of transportation during the George H.W. Bush administration and is a longtime Washington transportation attorney.

Blaze, the veteran rail consultant, takes a somewhat different view. Between 2000 and 2016, railroads “lost the mission of Staggers” by focusing more on dividends and stock buybacks during the flush free-cash-flow years.

There is palpable concern that the changing regulatory climate may lead to the baby — the baby, in this case, being Staggers — being thrown out with the bathwater. In a letter published Wednesday, a cross-section of more than 1,000 national and local leaders celebrated the “progress made under Staggers” and warned against “wholesale changes” that could threaten those gains.

“Any action inhibiting freight rail investment would threaten economic development and quality of life in our communities, precipitate job losses in the rail supply and contracting sectors and undercut safety, efficiency and productivity across the rail network, affecting all railroads, small and large,” the letter said.

Train wreck

That a letter marking Staggers’ 40th anniversary would equally praise it and warn against reversing it brings to mind what the railroad industry was like before Staggers. Some already-healthy industries are deregulated to make them even more efficient. In the case of the railroad industry, deregulation was meant to save it from ruin. 

It is hard for most modern-day transport executives to comprehend the rail industry’s horrid condition when Harley Staggers introduced his bill in 1979. Railroads were weighed down by heavy-handed regulations that failed to keep up with free-market changes. Proposals to shed fixed costs such as unprofitable tracks got bogged down in bureaucracy. Most years, railroads earned a paltry 2% return on investment, making it difficult to attract the capital to invest in their private networks. Shippers were frustrated by lousy service. Deferred maintenance was so common that the standing joke was that a stationary railcar would fall over because of the condition of the underlying track. 

The crowning blow was the construction of the Interstate Highway System that began in the mid-1950s. The interstate system gave many shippers a true modal alternative for the first time and allowed truckers to capture meaningful market share. The rail industry was put on the ropes. 

In 1969, seven Northeastern railroads that comprised the Penn Central Railroad went bankrupt. The 1976 Railroad Revitalization and Regulatory Reform Act, the precursor to Staggers, reorganized the railroads under what would become known as Conrail. Burnley, who joined DOT in 1981 and helped steer what would eventually be a joint sale of Conrail to CSX Corp. (NYSE:CSX) and Norfolk Southern Corp. (NYS:NSC), said it’s possible that Conrail would have remained a ward of the state were it not for the Staggers Act.

Unlike the airlines, which had to be dragged kicking and screaming into their own deregulated world in 1978, most railroads welcomed deregulation as a way out of their travails. Unlike the trucking industry, which saw an avalanche of new entrants and the advent of nonunion carriers that drove down driver wages, the railroads saw little new entry on the back of Staggers. Labor attrition came as carrier consolidation took hold, and new technologies and work rules reduced the size of labor and the corresponding costs.

The turnaround didn’t happen overnight. Depending on the carrier, it took seven to eight years — to as long as 20 years — to fully adjust and then realize the benefits wrought by the Staggers Act. But when the benefits came, they were overwhelming. Railroads began making money hand over fist. Stock buybacks became commonplace in an industry in which such practices weren’t. Operating ratios, the measure of revenues over expenses, would eventually fall into the 60% range for some railroads, meaning they were capturing 40% of their revenue as profit. Rail veterans had to blink three times to make sure they were seeing right.

Blaze, who began his railroading career in 1968, marvels more than 50 years later at how deregulation turned the pumpkin into a prince. Burnley, a strong free-market advocate and no newcomer himself, was just as praiseworthy of the Staggers Act. “The market fundamentally works,” he said. “And it worked amazingly well for the railroads.”

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