Railroad Revitalization and Regulatory Reform Act

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The Railroad Revitalization and Regulatory Reform Act of 1976, Pub. L. 94-210, Feb. 5, 1976, 90 Stat. 31, was a United States federal law that funded the reorganized bankrupt Northeast and Midwest railroads that formed Conrail in 1975; it is best known for approving the Final System Plan for Conrail which specified which lines Conrail would receive. The act also authorized financial subsidies for upgrading rail facilities, and contained 'regulatory reform' provisions. It was the first in a series of acts which collectively are described as the deregulation of transportation in the United States. It was followed by the Airline Deregulation Act (October 24, 1978), Staggers Rail Act (signed October 14, 1980), and the Motor Carrier Act of 1980 (signed July 1, 1980).

The 'Declaration of policy' in the Act (Section 101), was as follows

   (a) Purpose
    It is the purpose of the Congress in this Act to provide the
  means to rehabilitate and maintain the physical facilities, improve
  the operations and structure, and restore the financial stability
  of the railway system of the United States, and to promote the
  revitalization of such railway system, so that this mode of
  transportation will remain viable in the private sector of the
  economy and will be able to provide energy-efficient, ecologically
  compatible transportation services with greater efficiency,
  effectiveness, and economy, through - 
      (1) ratemaking and regulatory reform;
      (2) the encouragement of efforts to restructure the system on a
    more economically justified basis, including planning authority
    in the Secretary of Transportation, an expedited procedure for
    determining whether merger and consolidation applications are in
    the public interest, and continuing reorganization authority;
      (3) financing mechanisms that will assure adequate
    rehabilitation and improvement of facilities and equipment,
    implementation of the final system plan, and implementation of
    the Northeast Corridor project;
      (4) transitional continuation of service on light-density rail
    lines that are necessary to continued employment and community
    well-being throughout the United States;
      (5) auditing, accounting, reporting, and other requirements to
    protect Federal funds and to assure repayment of loans and
    financial responsibility; and
      (6) necessary studies.
  (b) Policy
    It is declared to be the policy of the Congress in this Act to - 
      (1) balance the needs of carriers, shippers, and the public;
      (2) foster competition among all carriers by railroad and other
    modes of transportation, to promote more adequate and efficient
    transportation services, and to increase the attractiveness of
    investing in railroads and rail-service-related enterprises;
      (3) permit railroads greater freedom to raise or lower rates
    for rail services in competitive markets;
      (4) promote the establishment of railroad rate structures which
    are more sensitive to changes in the level of seasonal, regional,
    and shipper demand;
      (5) promote separate pricing of distinct rail and rail-related
    services;
      (6) formulate standards and guidelines for determining adequate
    revenue levels for railroads; and
      (7) modernize and clarify the functions of railroad rate bureaus.

The financial assistance provisions of the Act were largely palliative and transitional. They were extended on the condition that changes in the regulatory system governing rail roads be enacted, with the hope that a regulatory system which gave railroads more freedom in pricing and service arrangements, subject to greater competitive constraints, would yield a more viable industry and better service for its users. Studies of the legislative history of the Act indicate that the Gerald Ford Administration secured the regulatory provisions only by threatening a veto of any act containing financial assistance for railroads but no reform of the regulatory system.

The changes in regulation provided for were as follows:

Section 202 provided that rail rates would not be considered ‘unjust and unreasonable’ if they exceeded long run marginal costs (on the low side) and (as to the high side) applied to traffic as to which the railroads did not have ‘market dominance’ (a term related to concepts of monopoly power). The railroads were to be allowed to explore this ‘zone of reasonableness’, with presumptions against suspension or challenge of proposed rates, at a rate of 7% per year.

Section 206 provided for, in substance, contract rates for transactions involving an investment of more than $1 million dollars.

Section 207 provided the Commission with authority to exempt from regulation entirely categories of traffic, upon making findings, in substance, that regulation was unnecessary.

Section 208 prohibited collective rate making on movements which a rail carrier could handle entirely on its own system (‘single line rates’), and buttressed the right of ‘independent action’ by rail carriers.

In a signing statement, president Gerald Ford stated

"In addition to providing short-term financial assistance, Congress in approving this legislation has taken a fundamental step to restore the long-term economic health of this vital American industry. The regulatory reform provisions in this bill are long overdue, and I commend the Congress for this farsighted and necessary action. This kind of fundamental change in government policy takes time. Every President since Harry S. Truman has called in vain for increased competition and reform of our regulated industries. For example, the Landis Report commissioned by President-elect Kennedy in 1960 recommended major policy revisions in transportation regulation. But for more than a quarter of a century, the Nation has had no results. In contrast, the Railroad Revitalization and Regulatory Reform Act is the first significant reform of transportation regulation by any administration--or Congress. An equally important task facing us now is to extend the principles of reform embodied in this legislation to the aviation and motor carrier industries. In these industries, we must strive to create a regulatory climate which relies on competitive forces, rather than on inflexible and bureaucratic directives of Federal agencies, to determine which firm will provide the desired transportation services and at what price. The time has come to place greater reliance on market competition."

Many of the members of The Interstate Commerce Commission at the time of this bill’s enactment were highly unsympathetic to the aims and provisions of the ‘4R’ Act. The regulatory provisions had been enacted over several Commissioner’s objections, and the Commission's implementation of the Act initially had little impact on the way the rail industry functioned.

When President Jimmy Carter nominated A. Daniel O’Neal, originally appointed by President Richard Nixon, to the Chair of the ICC, O’Neal began to develop the possibilities for opening up the rail market to competition and innovation. Also, in 1978 a group of major railroads formed an organization called TRAIN (Transportation by Rail for Agricultural and Industrial Needs.) to support further deregulation of the Industry. According to scholars Derthick and Quirk, in “The Politics of Deregulation’, these carriers’ perception was that with collective rate making limited, and a Commission apparently more interested in letting their rates go down than go up, the regulatory system, as a whole, in the net, no longer favored them.

Large shippers of goods by rail also wished to have more flexibility in the rail market. The net result of compromise between the carriers and the shippers, and the Jimmy Carter Administration’s push for a more competitive transport was the Staggers Act of 1980. The Staggers Act worked from the ‘4R’ Act template, but extended its provisions. One of the key changes from the 1976 Act was allowance of secret contracts between carriers and shippers, not limited to large-investment situations and not effectively subject to regulatory review. According to former Congressional Budget Office analyst Christopher Barnekov, such contracts allowed the rail carriers and their shippers much more opportunity readily to develop more efficient transport arrangements which lowered costs for the carriers, yielding better returns for the carriers and lower rates for the shippers.

Thus railroad ‘deregulation’ was a two step process, starting with the Regulatory Revitalization and Regulatory Reform Act of 1976 and concluding with the Staggers Act. In substance, the railroad regulatory reform legislation, in the 1970-1980 period, turned toward greater use of market systems to deal with the problems of the rail industry in the United States, rather than resorting to nationalization, which had been considered from time to time.