Economic Foundations for 21st Century Freight Rail Rate Regulation

The Staggers Rail Act of 1980 made a substantial break from an almost century-old policy of pervasively regulating the prices for freight rail services provided in the United States. In particular, rather than regulators establishing prices, Staggers permits shippers and railroads to voluntarily negotiate rates, terms and conditions, with regulation providing a fallback if negotiation fails or is too onerous for what is at stake on the shipment. While largely deregulating the rate-setting process, the statute requires that rates be “reasonable” in the event of a complaint filed by a shipper and where a railroad is found to be market dominant – a requirement that necessitates that regulators determine a method for assessing whether a given rate or set of rates is, in fact, reasonable. In the wake of the passage of Staggers, the Interstate Commerce Commission (ICC) [now the Surface Transportation Board (STB)] established the method for determining whether a rate is “reasonable,” in which case the rate is allowed to stand; or whether the rate is unreasonable and must be reduced. The system, known as Constrained Market Pricing (CMP), was established largely on a bedrock of economic theory and has been in place now for almost thirty-five years. Yet, absent a refresher, the passage of time creates the prospect that the economic foundations of CMP will fade. The purpose of this paper is to provide that refresher. Along the way we seek to re-establish the fundamental economic appeal of CMP, reflect on criticisms and alternatives that have been proffered, and offer refinements for rail regulation moving forward