Initially, the United States Interstate Commerce Commission defined a classification system by annual gross revenues taken in by an entity. Class I railroads were defined as railroads with an annual operating revenue of at least $1 million, while Class III railroads had incomes of less than $100,000 per annum. All such corporations were subject to reporting requirements on a quarterly or annual schedule. If a railroad slipped below the class qualification threshold for a period, it was not necessarily demoted immediately.
As an example consider that
in 1925, the ICC reported:
• 174 Class I railroads,
• 282 Class II railroads, and
• 348 Class III railroads.
Since the dissolution of the ICC in 1996, the Surface Transportation Board (STB) has become responsible for defining the criteria of each railroad class. The bounds are typically redefined every several years to adjust for inflation and other factors.
The initial $1 million criterion for a Class I railroad was used until January 1, 1956, when it increased to $3 million (equal to $25,758,874 today). In 1956, the ICC counted 113 Class I line-haul operating railroads (excluding "3 class I companies in systems") and 309 Class II railroads (excluding "3 class II companies in systems"). The Class III category was dropped in 1956 but reinstated in 1978. By 1963, the number of Class I railroads had dropped to 102; the cut-off increased to $5 million by 1965 (equal to $37,038,015 today), to $10 million in 1976 (equal to $41,023,392 today), and to $50 million in 1978 (equal to $178,954,082 today), at which point only 41 railroads were still Class I.
In a special move in 1979, all switching and terminal railroads were re-designated as Class III, even those with Class I or Class II revenues.
The Class II and Class III designations are now rarely used outside the rail transport industry. The Association of American Railroads typically divides non–Class I companies into three categories:
In early 1991, two Class II railroads, Montana Rail Link and Wisconsin Central, asked the Interstate Commerce Commission (ICC) to increase the minimum annual operating revenue criteria (then established at US$93.5 million) to avoid being redesignated as Class I, which would have resulted in increased administrative and legal costs. The Class II maximum criterion was increased in 1992 to $250 million annually, which resulted in the Florida East Coast Railway having its status changed to Class II. Rail carriers with less than $20 million in revenue are designated as Class III.
In Canada, a Class I rail carrier, is defined (as of 2004) as a company that has earned gross revenues exceeding $250 million (CAD) for each of the previous two years.
Currently, eleven railroads in North America are designated as Class I. In the United States Amtrak and seven freight railroads are designated Class I based on 2011 measurements released in 2013.(p1)
A Class II (Class 2) railroad is a freight-hauling railroad that is mid-sized in terms of operating revenue. As of 2006[update], a railroad with revenues greater than $20.5 million but less than $277.7 million for at least three consecutive years is considered a Class II railroad. Switching and terminal railroads are excluded from Class II status.
The last major change of the upper bound for a Class II railroad was in 1992; this changed the Florida East Coast Railway from a Class I railroad to Class II. A previous change in 1991 prevented two railroads, Montana Rail Link and Wisconsin Central, from being classified as Class I railroads; this change was made at the request of the two railroads involved, as they did not wish to take on the extra cost and paperwork associated with Class I status. Changes since have been adjustments for inflation.
A Class III railroad, or a short line railroad, is a rail company with an annual operating revenue of less than $20 million (1991 dollars). Class III railroads are typically local short line railroads, either serving a small number of towns and industries or hauling cars for one or more larger railroads. Many Class III railroads were once branch lines of larger railroads that were spun off, or portions of mainlines that had been abandoned. Most Class III railroads are owned by railroad holding companies, such as Genesee & Wyoming and Iowa Pacific Holdings.