Issue Spotlight: Common Carrier Obligations for Rail Carriers

A common carrier, under U.S. and British common law, is a firm that carries goods, people, or services for the benefit of the general public without discrimination, in contrast to a private or “contract” carrier, which can refuse to transport goods for anyone but its clients. Common carriers typically operate under license provided by a regulator with ministerial authority to interpret the terms of the carrier’s obligations to the public. 

In the United States, rail carriers have long been obligated as common carriers under federal statutes, agency actions, and judicial precedent. Particularly since the Staggers Rail Act of 1980—which legalized privately negotiated railroad-shipper contracts to govern rates, service levels, equipment, and minimum annual traffic volumes—this obligation has worked well to ensure fair and nondiscriminatory rail carriage, while also providing incentive for rail carriers to invest sufficient capital toward maintaining and upgrading the infrastructure that they own. 

Nonetheless, some have called for reform of the common-carrier obligation on grounds that it is imprecise and leads to inefficient outcomes. Policymakers should be cautious about heeding these calls, as they often amount to little more than rent-seeking behavior by large shippers, and would likely lead to dramatic price increases for goods and services throughout the economy.

What Critics Say

Major freight-rail shippers often claim that they have experienced declining service and rising prices. Toward that end, they have repeatedly supported various iterations of the Reliable Rail Service Act, proposed congressional legislation that would heighten rail’s common-carrier obligations.

According to the National Grain and Feed Association (NGFA), the bill is needed to address rail-service issues that have “caused supply chain disruptions, endangered the delivery of feed to livestock, led to grain processing facilities slowing and shutting down, and negatively impacted U.S. grain exports.” The American Chemistry Council assertsthat the bill would alleviate rail-transport conditions that have been “an impediment to chemical production.” U.S. Surface Transportation Board (STB) Chair Martin J. Oberman has further alleged that railroads are not meeting their existing common-carrier obligations.

The terms of the Reliable Rail Service Act would modify the statutory definition of a “common carrier” and  empower the STB to intervene in the operations of Class 1 railroads for various reasons, including disputes over: 

• Changing the frequency of a particular rail service;
• When and how to conduct railroad maintenance;
• The optimal level of labor staffing and equipment in operation; and
• Whether a shipper is satisfied with the operation of particular local services. 

In essence, the bill would grant the STB broader latitude to establish price caps (enforced under carriers’ obligation to offer “reasonable rates”) and to flip the common-carrier obligation on its head by granting shippers’ demands without concern for the broader needs to manage rail networks. 

Other legislation has been proposed with similar provisions. For example, the Freight Rail Shipping Fair Market Act would, among other things, expand STB’s discretionary power to interpret the common-carrier obligations, and empower it to intervene in private agreements between rail carriers and shippers.

Common-Carrier Obligations in Rail Transportation

U.S. rail carriers’ common-carrier obligation was first defined in statute by the Interstate Commerce Act of 1887 and has been further amended by subsequent laws, as well as by judicial and agency decisions. Broadly speaking, the obligation requires rail carriers to provide rail service on reasonable request and to establish reasonable rates and classifications for transportation and service.

Despite this long history of statutory, judicial, and agency dictates, the precise scope of the obligation remains unclear. Imprecision, however, is not the same as lacking a standard. Indeed, the reforms that advocates currently seek would do little to clarify the standard beyond  creating a bias in favor of shippers when they make demands of rail carriers. 

With this in mind, it is worth briefly surveying the existing regulatory obligation and prevailing judicial interpretations.

Statutory Requirements for Railroad Common Carriage

Under the Staggers Act, rail carriers have a duty to provide “transportation or service” to any entity on reasonable request according to established “rates and other service terms” (49 USC § 1101(a)-(b)). When servicing its customers in this manner, a rail carrier is obligated to comply with two broad requirements:

1.  It must offer “reasonable” rates (and the STB can impose a maximum reasonable rate); and
2. It may not engage in “unreasonable discrimination.” (§ 10701(d)(1); § 10707; § 10741(a)(1)).

A carrier unreasonably discriminates in its rates when it “charges… a different compensation for a service rendered… than it charges or receives from another person for performing a like and contemporaneous service.” (49 USC § 10741(a)(2)).

Further Rail Statutes Defining Common-Carriage Obligation

Judicial Agency Interpretation of Common-Carriage Obligations

As noted above, the common-carrier obligation is not precisely detailed in existing statutory law. Thus, proceeding on a case-by-case basis, judicial interpretations of STB actions and STB proceedings have provided a rich extension of the relevant statutes and present a continuation of the historic tradition of common-carrier obligations present in U.S. law. See, e.g.:

• Nat’l Grain & Feed Ass’n v. United States, 5 F.3d 306, 310 (8th Cir. 1993)
• Am. Trucking Ass’ns v. Atchison, T. & S. F. Ry. Co., 387 U.S. 397, 407 (1967).

Since the passage of the Interstate Commerce Act, however, the public duty of railroads has been broadened beyond that which existed under common law. (Akron, Canton & Youngstown R.R. Co. v. ICC, 611 F.2d 1162, 1168 (6th Cir. 1979)). Moreover, the common-carrier obligation is comprehensive and exceptions are not to be implied. (Am. Trucking Ass’ns at p. 407)

Notably, the duty of a common carrier is not absolute, (Livestock, South, Southwest, Central and Western Territories, 346 I.C.C. 418, 435 (1974)), but only requires that carriers act reasonably in their treatment of patrons. (Pa. R.R. Co. v. Puritan Coal Mining Co., 237 U.S. at p. 133.) And what constitutes reasonable service can vary depending on prevailing circumstances (B.J. Alan Co., Inc., 5 I.C.C.)

Critically, “reasonable” and “nondiscriminatory” service does not require that a carrier service every demand of every shipper. Instead, the railroad—as the party best-positioned to allocate scarce resources—has discretion to decide on services and schedules. (Texas Mun. Power Agency v. Burlington N. & S.F. Ry. Co., NOR 42056, slip op. at 6 (STB served Sep. 27, 2004)). Toward this end, the STB has recognized that it is necessary to afford rail carriers the opportunity to  “adjust the level of train traffic over particular line segments in response to changes in shipper demands and in other market conditions.”

What Reform of the Common-Carrier Obligation Could Entail

The most popular reforms to common-carrier obligations—as embodied in the Reliable Rail Service Act—would represent a major step backward from the bipartisan consensus reached in the Staggers Act and would further amount to a massive re-regulation of the industry.

If successful, these reforms could force carriers to operate in inefficient ways that conflict with the deregulatory principles that have governed the industry for more than 40 years. Moreover, the changes sought by shippers could lead to less services, lower quality, and net price increases that would propagate throughout the economy in the form of higher prices on many goods and services.

Since 1980, railroads have increased productivity, lowered rates, and reinvested hundreds of billions of dollars back into their networks to create what is now the safest and most efficient freight-rail system in the world. Between 1980 and 2021, U.S. rail carriers have spent nearly $760 billion on capital expenditures and maintenance expenses.

By definition, expanded regulation will limit rail carriers and shippers’ ability to negotiate mutually beneficial agreements. As is well-understood in the literature, this will generate price distortions that drive up the cost of goods across the U.S. economy. 

The same problem attends the expanded discretionary authority that advocates wish to grant the STB to enforce the common-carrier obligation. Empowering the agency to centrally manage everything from the frequency of service to how labor and other resources are allocated to the particular maintenance schedules that rail carriers must follow will not lead to more competition, but less. These new regulations on rail carriers will be inefficient impositions from outside the competitive process that will necessarily deter innovation, investment, and new entry. 

Rail carriers already operate in a common-carrier regime informed by decades (or even centuries) of common law. There is no indication that rail carriers are failing in these common-carrier obligations. Lawmakers should proceed with caution before facilitating rent-seeking behavior that will upset decades of bipartisan consensus.

Further Reading