What the STB Reauthorization Means for Rail Freight Rates

Freight TrainWhat the STB Reauthorization Means for Rail Freight Rates

The House of Representatives passed The Surface Transportation Board Reauthorization (STB) Act last week, clearing the way for increased checks and balances within the regulatory body. The bill is now awaiting the president’s expected signature.

The STB is the federal regulatory body that handles the economic oversight of the U.S. rail system, including: mergers, line acquisitions, construction and abandonment of new lines, rail freight rates, and more. Now, the reauthorization act is set to strengthen the STB’s ability to handle these rail issues effectively and efficiently.

What is the STB Reauthorization Act?

The reauthorization act is being called common sense within the industry. It’s going to implement what most believe are reasonable reforms to the system, that will help keep one of America’s most economically competitive industries running smoothly.

A few noted reforms from the STB Reauthorization act include:

  • Instatement of the STB as an independent government agency subject to the DOT Inspector General’s authority review.
  • Expansion of STB members from three to five.
  • Grant the STB the authority to proactively resolve problems in order to avoid lengthy, and expensive disputes.
  • A required database concerning all rail complaints.
  • Creating timelines for rail rate reviews, and expanding voluntary arbitration procedures to facilitate a quick and efficient resolution between the railroads and rail shippers.

All the details of the STB Reauthorization Act can be read here.

So what does this mean for rail freight rates?

It means that when customers and the railroads have a dispute about rate and service, the STB can work to find a solution in a more efficient way. Before, the STB did not have as much authority, and disputes could be dragged on far longer than necessary, costing both parties time and money.

By congress passing the act, they also reaffirmed economic regulations that allow market-based competition to establish rate and service standards. This means that the railroads can continue to earn the revenues to expand and maintain the countries 140 thousand mile private rail network. The investments made into the infrastructure by the private rail sector are necessary to continue servicing, and growing the freight transport demands within the United States. But the act also provides a safety net for customers, by giving the STB the authority to better handle rail freight rate disputes. The Association of American Railroads President, and CEO Ed Hamberger says, “This legislation strikes the right balance of preserving a market-based structure for shippers and railroads, while also providing common sense process improvements that will allow the STB to work more efficiently”.

Where are rail freight rates at now?

Take a look at this graph from the AAR. They say due to productivity efficiency and improvement, rail freight rates of today can move twice as much product for nearly the same cost as 30 years ago.

But experts within the industry say rail freight rates are slighting increasing to ensure continued revenue growth that can support maintenance and expansion for the rails. And now if any disputes arise about these increasing costs, the STB can take a more proactive approach to resolving these issues between the railroads and their customers.

Why is it important to better regulate the freight rail system?

The freight rail system may be a product of the industrial revolution, but it’s importance in our country’s economy, and transportation system has not wavered. The rail system has adapted to the technology by moving from steam locomotives to diesel, and improving the tracks as well as the build of the locomotives themselves has only refined their reliability. Infact, with the proper equipment and improvements in carrying capacity, the rail system can be more energy efficient than trucking. Improvements that have revolutionized the railroads include unit trains, which ship one commodity from its origin to a single destination, as well as the double stacking of containers.

The rail system is vital to our country’s transportation infrastructure, but of course there are limitations that come with the rail, such as it’s lack of flexibility, which lead to a turn to trucking. But the rail does what trucking cannot do, by carrying commodities that are just too heavy, and commodities that are unpackaged and in bulk, such as: coal, ore, grain, and even liquids like petroleum.

Railroads also transport essential goods like:

  • Clothing, and textiles.
  • Food products, from soybeans and frozen meats to ice cream and fruits.
  • Minerals, like sand a gravel used for construction. As well as fertilizers and clays.
  • Crude oil, and gas.
  • Lumber.
  • Paper products ranging from pulp to paper bags.

Although the rail system carries a large load of the nation’s commodities, it was deregulated back in the 1980’s as the costs began to rise faster than demand. Railways began selling off lines, downsized locomotive staff, and brought in subcontractors to handle maintenance and repairs on their lines. And while this deregulation has allowed for the industry to resurge, and stay a vital part of the U.S.’s transport network, those within the industry agreed that the addition of new checks and balances would only help the rail system continue to better serve their clients, and grow alongside the economy.

Where is the rail industry going?

It’s Expanding

The AAR says that in 2015 the rail industry was in demand, and integral for the country’s continued economic growth, “By providing cost-effective transportation of goods, from lumber to oil to auto parts, freight rail is playing a central role in positive economic trends — including rising gross domestic product, improving employment statistics and low gasoline prices”.

And the industry is using these gains to further expand their reach. In 2015, rail companies spent an estimated record of $29 billion for maintenance and growth of the railroads to better service their customers. Regulatory acts like the reauthorization act do not hinder the railroad’s plans for expansion, instead it adds greater oversight to an industry that needs it simply because of it’s rapid growth.

Containerization

Containers are already widely in use within the transportation industry, but train freight’s have a unique advantage that will secure its place in the transport economy. When it comes to trucking, each added container involves the same marginal cost increase — but for the rail, there is a decline in the marginal cost per container making economies of scale easily attainable.

The containerization of commodities also allows for easy switches in intermodal transport. A large amount of containers can be picked up off of a cargo ship, put onto a rail freight, and brought to a region where the containers are then distributed onto different trucks and brought to their various locations. The railroad then plays a vital role in the circulation of these commodities across the country, because it can efficiently carry a large number of containers to the region in need.

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