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Freight Rail and the Stand-Alone-Cost Test

Updated: Mar 15

The extensive U.S. railroad network, combined with its ability to move goods in bulk efficiently, makes freight rail the optimal choice for domestic shipping. However, many businesses complain about freight rail’s lack of competition, giving operators ample incentive and ability to raise shipping rates to the disadvantage of customers.


The Staggers Act of 1980 significantly deregulated freight railroads, helping improve efficiency and reduce costs by nearly half. Nevertheless, deregulation also encouraged consolidation in the 2000s, and the number of carriers dropped from 30 to 7, with the most powerful four controlling 90% of total traffic. Rates also bounced back,–rising 43% since 2004–propping up operational costs for business owners who depend on railroad transportation.


The most vulnerable businesses include “captive shippers,” who are economically compelled to use one railroad due to a lack of alternatives. Almost half of railroad revenue comes from them, but they have little leverage in rate negotiations. In defending captive shippers, the government adopted the “stand-alone-cost (SAC) test,” modeling a hypothetical railroad serving the same route on a smaller scale at optimal efficiency.


The operational costs of this imaginary railroad, plus a reasonable investment return, are set as the maximum rates that captive shippers can charge. However, the burden of such costly evaluations falls on captive shippers, who face information asymmetry and a poorly defined set of technical guidelines. Therefore, several industries are calling for further freight rail reforms. 


Sources


Freight Rail Facts and Figures. Association of American Railroads, Sep. 2022. https://www.aar.org/facts-figures. Accessed 21 Sep. 2022.


Freight Rail in America: Can a Market Be ‘Free’ if There’s Almost No Competition? American Fuel & Petrochemical Manufacturers (AFPM Communications), 25 Apr. 2022. https://www.afpm.org/newsroom/blog/freight-rail-america-can-market-be-free-if-theres-almost-no-competition. Accessed 21 Sep. 2022.


Laurits R. Christensen Associates, Inc. A Study of Competition in the U.S. Freight Railroad Industry and Analysis of Proposals That Might Enhance Competition. U.S. Surface Transportation Board, Nov. 2009.


Pittman, Russell. Against the Stand-Alone-Cost Test in U.S. Freight Rail Regulation. U.S. Department of Justice, Apr. 2010. https://www.justice.gov/atr/against-stand-alone-cost-te

st-us-freight-rail-regulation. Accessed 21 Sep. 2022.


“Rail,” 2017 Infrastructure Report Card. American Society of Civil Engineers, 2017.

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