WATCHING WASHINGTON, SEPTEMBER 2025 ISSUE: One’s eyes are wide shut not to acknowledge a polarizing dispute ensnaring railroads and their captive shippers—those lacking effective transportation alternatives—in a muddy morass as to whether railroads are revenue adequate.
The debate is not inconsequential, as partial economic deregulation in 1980 (Staggers Rail Act) preserved protections—as administered today by the Surface Transportation Board (STB)—for some 20% of traffic considered captive to rail. Whether and what railroads are pronounced by the STB as revenue adequate has significant impact on captive shippers, as when railroads seek to raise rates, a revenue adequacy determination places with railroads a burden of defending that action.
Revenue adequacy, as defined by statute, means earning enough to cover total operating costs, including depreciation and obsolescence, plus a competitive return on invested capital sufficient over the long term to attract more of it to maintain a railroad’s large and costly infrastructure, including locomotives and rolling stock. It’s a mouthful, so no wonder railroads and their customers can’t agree on the determination process.
Congress instructed the STB to make an annual revenue adequacy determination, which it does by comparing each carrier’s return on net investment (ROI) with the rail industry’s after-tax cost of capital. The cost of capital is determined from the interest paid on debt and an estimate of returns shareholders require for their investment risk. If a railroad’s ROI exceeds the industry’s cost of capital, the carrier is considered revenue adequate.
Once a railroad is determined by the STB to be revenue adequate, it must, when seeking a rate increase, demonstrate “with particularity” its need for higher revenue; the harm it would suffer if prevented from collecting it through higher rates; and why a shipper without effective transportation alternatives should pay those higher rates.
Captive shippers say most, if not all, Class I railroads are—and have been since at least 2015—revenue adequate. Thus, they say, the STB should constrain—which it has not done—future rail rate increases to no more than the revenue adequate carrier’s actual cost increases incurred in handling the freight. The progeny of this debate is an acrimonious rhetorical loop as illustrated in this abridged version:
SHIPPERS: Railroads absolutely are revenue adequate. Warren Buffett’s legendary Berkshire Hathaway holding company would never have purchased BNSF in 2010 were it not revenue adequate. As far back as 1995, the president of the Association of American Railroads spoke of the industry’s “new golden age.”
RAILROADS: Buffett’s strategy is long-term value investing. He bought BNSF because he considered it undervalued. The STB did not find BNSF revenue adequate at the time of its purchase in 2009 or in 2010.
SHIPPERS: Then why, since 2010, have railroads paid out more than $270 billion in stock buybacks and dividends?
RAILROADS: Capital is a coward. During times of uncertainty, investors withdraw and seek return of their capital for use elsewhere. Coal, long the railroads’ mainstay traffic, is down 50% since 2014. Its successor, intermodal (containers and trailers on flat cars), faces significant headwinds. Among them are self-driving trucks; the peril of Congress permitting longer and heavier trucks on federal-aid highways; legislative resistance to reducing the shortfall in heavy-truck user fees assessed for pavement and bridge damage; rail labor’s resistance to smaller crew size, automated safety inspections and cost-reducing operating strategies such as Precision Scheduled Railroading (PSR); and activist regulators wanting to micromanage and preserve unproductive jobs.
SHIPPERS: PSR and crew size reduction are Wall Street-driven strategies to “goose” short-term returns and stock price but are not effective over time at attracting freight from trucks and satisfying shipper wants. Railroads should be investing profits in service improvements.
RAILROADS: Notions of “build it and they will come” best belong in baseball-themed novels and movie scripts. Opposition to smaller crew size and PSR encourages stagflation—increased operating costs, higher freight rates to recover them, loss of traffic to lower-cost truck competitors and a return to excess capacity that contributed to the railroads’ darkest financial days when service quality was an oxymoron.
SHIPPERS: STB predecessor Interstate Commerce Commission (ICC) ruled in 1985 that a railroad should not use its market power “to consistently earn, over time, an ROI above the cost of capital.” By avoiding a revenue adequate designation, they are doing just that.
RAILROADS: Investors have expectations that railroads will earn greater than their cost of capital consistently over time, or they will find better investment opportunities. The result of capping returns at the cost of capital will be deferred maintenance and an inability to renew plant and equipment—essential to meet shipper wants.
SHIPPERS: The STB’s failure to impose rate constraints on revenue adequate railroads is troubling. By STB calculations, Union Pacific has been revenue adequate every year since 2011. CSX has been revenue adequate every year since 2018. No railroad ever said in its annual report it is revenue inadequate.
RAILROADS: Annual STB revenue adequacy determinations look backward, not forward. They do not incorporate headwinds that are substantial, as mentioned. They are a historical accounting snapshot.
What Might Be Done?
Although the STB opened a proceeding in 2014, inviting comments on how its revenue adequacy determination methodology might be improved; and although railroads in 2020 asked the STB to consider whether railroads require a return greater than their cost of capital to attract adequate investment, the STB discontinued both proceedings in July 2025. It said “the public interest would be better served” by devoting scarce resources to other matters.
Although captive shippers still can file complaints that rail rates are unreasonable, they have ceased doing so, citing millions of dollars in costs to pursue those challenges and “minimal expectation” of victory.
For the foreseeable future, captive shippers are unlikely to find salvation at the STB or before Congress owing to a political atmosphere discouraging federal agency regulation. That leaves shippers distrusting the STB, and railroads saying results disliked by shippers confirm there is no market power abuse.
Shippers are not alone in criticizing the STB’s superintending of its revenue adequacy responsibility.
The National Academy of Sciences’ Transportation Research Board concluded in a congressionally funded study that an annual revenue adequacy determination “serves no constructive purpose.” Economist Alfred E. Kahn—acknowledged as the “father of airline deregulation”—said the STB’s annual revenue adequacy determination produces “nonsensical results.”
An example is STB’s using stock prices as part of determining industry-wide cost of capital. Berkshire Hathaway-owned BNSF, which earns one-third of the Big Four railroads’ total revenue (BNSF, CSX, Norfolk Southern and Union Pacific), has no publicly traded stock, leaving a gaping hole in the STB’s analysis.
STB staff also is critical. In 2019, an STB internal Rate Reform Task Force said the agency’s methodology can result in a railroad being found revenue adequate in a single year and still not be long-term revenue adequate; or be found revenue inadequate in a single year even though it is long-term revenue adequate.
If the process is broken, captive shippers have an option to exploit an upcoming window of opportunity presented by the consolidation desire of Union Pacific and Norfolk Southern—and, maybe, BNSF and CSX.
Imagine a contractual transaction that would help railroads demonstrate enhanced competition resulting from merger, as is required of applicants. In exchange for shippers supporting merger, the railroad applicants would agree to link future rate changes to service performance metrics, with penalties for failure to meet minimum standards. The Gordian knot to solve is that service failure penalties will not cause fewer future commitments.
Railroads are enthusiasts of such market-based performance standards, long advocating they replace prescriptive safety regulation. UP may be ready to deal. CEO Jim Vena has already promised, in exchange for labor support, workforce lifetime income protection.
Resentment and anger between railroads and captive shippers are inevitable so long as each views the relationship as a zero-sum game, where when one “wins” the other “loses.” Crafting a symbiosis through arms’ length bilateral agreements is preferable to third-party determinations, as rotating third parties (new regulators, new lawmakers) can be polar opposites. History is replete with examples.
