Research reveals large increase in non-competitive rail revenue 

By Max Fisher, Vice President, Treasurer and Chief Economist 

The Rail Customer Coalition published a research report on July 29 revealing that over the last 15 years there has been a dramatic increase in the share of revenue the Class I railroads obtain from customers’ rates considered non-competitive by the Surface Transportation Board (STB). 

NGFA President and CEO Mike Seyfert is quoted in the report’s press release saying: “This RCC report further demonstrates that rail carriers are able to extract monopoly rents in the absence of cost-effective, transparent, and fair rate appeal procedures. Unreasonably high rail rates lead to lower farm gate values, higher retail food prices and undermine U.S. agriculture’s international competitiveness. The NGFA continues to communicate with the STB as it undertakes proceedings on expanding access for rate relief and increasing competition. NGFA urges enactment of policies that provide balance between rail carriers and the U.S. industries that depend on rail transportation.”

The analysis, performed by Escalation Consultants, covered the change in railroad pricing for eight major commodity groups: farm products, food products, wood products, pulp and paper products, chemicals, stone and glass products, metal products and transportation equipment. The following are some important changes in railroad pricing practices that have occurred over the last fifteen years: 

Revenue from non-competitive rates increased 230 percent, while revenue from competitive rates increased only 24 percent.
Half the commodities had non-competitive pricing revenue increase by more than 300 percent.
In 2019, half of all railroad revenue was generated from non-competitive rates, up from 27 percent in 2004.
The large increase in non-competitive revenue caused the overall average Revenue to Variable Cost Ratio (RVC) for competitive and non-competitive movements to increase from 134 percent to 165 percent between 2004 and 2019 for shipments of the eight commodities in the analysis.
Real rail rates (inflation adjusted rates) increased 43 percent while real rail expenses increased only 8.1 percent.
Since 1980, the average percent increase in rail rates of the U.S. railroads was 2.4 times the rate of inflation.

Data and determination of non-competitive movements
The data used in the analysis of railroad pricing for non-competitive and competitive revenue between 2004 and 2019 comes directly from the STB’s annual commodity revenue stratification reports. The determination of whether movements are considered potentially non-competitive or competitive in the analysis is based on the STB calculation of the RVC’s for rail movements, which is an important part of the regulatory process. The RVC for a movement must reach 180 percent for the STB to have any authority over the rate for a movement. Movements with RVC’s at or greater than 180 percent are considered potentially non-competitive by the STB. 

The researchers noted that in the post-railroad consolidation era, rail rates have increased 2.4 times the rate of inflation as well as the rates of railroads biggest competitor, long-haul trucking.  Class I railroads in the United States went from 26 in 1980 to seven by 2001. The researchers surmised that to reverse the existing pattern of change in railroad pricing practices likely will require more effective and less expensive methods to challenge non-competitive rail rates.