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Flashback Friday: The ICC & The Railroads


FreightWaves publishes articles that look back at various aspects of the transportation industry's history. If there are topics that you think would be of interest, please send them to media@freightwaves.com

The Interstate Commerce Act was passed in response to rising public concern with the growing power and wealth of corporations, particularly railroads, during the late 19th century. At that time, railroads were the principal form of transportation for both people and goods, and the prices they charged and the practices they adopted greatly influenced the entire economy.

To many, the railroads were perceived to have abused their power as a result of too little competition. Railroads also banded together to form trusts that fixed rates at higher levels than they could otherwise command. In addition, railroads often charged a higher price per mile for short hauls than for long hauls. This practice was perceived as discrimination against individuals and smaller businesses.

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Responding to widespread public anger, a number of states passed legislation in an attempt to regulate the railroads. During the 1870s numerous constituencies, most notably the Grange (a national organization of farmers), sought Congressional action. However, Congress failed to act. In the 1886 case Wabash, St. Louis & Pacific Railway Company v. Illinois, the U.S. Supreme Court ruled that state laws regulating interstate railroads were unconstitutional. The basis of the ruling was that the various state laws violated the Constitution's Commerce Clause, which grants Congress the exclusive power "to regulate Commerce... among the several States..." Congress passed the Interstate Commerce Act the following year and President Grover Cleveland signed the bill into law on February 4, 1887.

In 1903, Congress passed the Elkins Act, which prohibited the railroads from granting rebates to their most valued customers. For example, while companies that were part of the trusts that existed at the time paid the posted rates, they demanded (and received) rebates on those payments. Therefore, the railroads' largest customers paid less for rail service than farmers and other small operators.

While these customers may have been the railroads' largest customers, they were not liked by the railroads. The railroads had long resented being extorted by these large companies and were in favor of the legislation. The Elkins Act also mandated that rates had to be published and that violations would make both the railroad and the shipper liable for prosecution. While the law solved some problems, other issues still needed to be fixed.

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In 1906, nearly 20 years after the ICC was first created, the Hepburn Railway Regulation Act was passed by Congress. It was one of the major legislative achievements of the Progressive Era in the United States and President Theodore Roosevelt was a major proponent of the bill.

The Hepburn Act strengthened the ICC by: increasing the number of commissioners from five to seven; expanding its authority and empowering it to set maximum railroad rates, institute standardized accounting practices, and require railroads to file annual reports; placing the burden of proof on the shipper, not the ICC in appeals cases; and bringing other common carriers (businesses that transport goods or information for a fee), such as terminals, storage facilities, pipelines, ferries and others, under ICC jurisdiction.

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While these legislative changes provided the ICC greater oversight, they also led to unintended consequences. Over the course of time, ICC rules and regulations stifled price competition among the railroads. During World War I the federal government nationalized the railroads, and by the end of the war it had provided subsidies to the railroads of about $1.5 billion (in 1919 dollars; that would be equivalent to subsidies of nearly $21 billion today!). A key effort after the war was to make the railroads profitable. The Transportation Act of 1920 essentially turned the industry into a cartel, and mandated that the ICC establish rates to provide a "fair rate of return." The legislation gave the ICC authority over the entry of railroads into the market, rail line abandonment, mergers between railroads, minimum rates, intrastate rates, and the issuing of new securities.

But the Act did not work as intended; even during the prosperous 1920s, railroad earnings never reached what was deemed a fair rate of return. Moreover, competition from the growing trucking industry generated major problems for many of the railroads. In the 1930s, because of the Great Depression and increased competition from trucking, railroad profits dropped even further; for the first time, they were negative for the entire industry. Seeking to improve their profitability, railroad industry leaders, as well as ICC commissioners, urged Congress to regulate the trucking industry. This led to the Motor Carrier Act of 1935.

From 1900-1975, ICC regulation of the railroads grew more burdensome and intrusive. They were prevented from abandoning unprofitable rail lines and business. Moreover, ICC regulations restricted rates and encouraged price collusion. By the late 1970s, many railroads faced bankruptcy, and the federal government faced the prospect of having to take over the railroads to keep them operating.

When Congress enacted the Staggers Rail Act of 1980, it deregulated most railroad activities, including the relationship between the railroads and their customers where market competition existed.

However, many rail customers felt that the ICC's implementation of the Staggers Rail Act did not provide as many protections for them as were included in the Act itself. After the Staggers Rail Act became law, the ICC allowed almost every proposed major railroad merger. However, when Congress passed the Act it did not remove the antitrust exemptions granted over the decades to the railroads.

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Fifteen years after the passage of the Staggers Rail Act, Congress passed the ICC Termination Act, which abolished the ICC and replaced it with the Surface Transportation Board.

What has occurred in the rail industry since the Staggers Act was passed? Consolidation – the number of major railroads dropped from about 40 in 1980 to four in 2013 because of consolidation. At this time, four railroads including BNSF Railway (NYSE: BRK-A), CSX Transportation (NASDAQ: CSX), Norfolk Southern Corp. (NYSE: NSC), and Union Pacific Corporation (NYSE: UNP) control over 90 percent of the rail traffic in the nation. In addition, three other railroads operate in the United States – the Canadian National and Canadian Pacific and the Kansas City Southern, which is classified as a major railroad but is similar to a regional carrier.

Today, little competition exists in our nation's rail system for rail-dependent shippers. However, according to the Surface Transportation Board, railroad rates fell by 45 percent in inflation-adjusted dollars from 1984 to 1999.

In Part Three of this series, the impact of the Interstate Commerce Commission on the trucking industry will be reviewed. If you would like to read Part One (Flashback: The story behind the once-mighty Interstate Commerce Commission), follow this link.

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