Don't Re-Regulate the Railroads

Don't Re-Regulate the Railroads
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Proponents of railroad re-regulation have a new definition of “competition.” Competition, they say, is when the government steps in and orders one company to use privately owned facilities on behalf of a competitor and then tells that company what rate to charge for the service. This sort of direct government intervention and manipulation of the marketplace is hardly consistent with a free-market economy, or with the true competition a healthy private enterprise system fosters. 

But that’s just what a small group of powerful shippers are calling for. The U.S. Surface Transportation Board (STB), the independent agency tasked with regulating freight railroads and their privately owned infrastructure, is currently weighing a number of proposals that would effectively undo the de-regulatory framework enacted in 1980. That framework reversed the effects of heavy regulation, which threatened the financial viability of the railroad industry. The STB is considering this policy reversal not because of any market failure, but, rather, because some shipping companies don’t like the market price they pay to railroads for transportation costs and so have asked the government to step in.

In reality, however, average inflation-adjusted rail rates were 45 percent less in 2015 than in 1981. That means the average rail shipper today can move close to twice as much freight for about the same price it paid 35 years ago. 

The importance of rail transportation is obvious when you consider the scalability of rail, which allows more affordable freight transportation per mile. For instance, research shows that if all freight rail traffic were shifted to trucks, rail shippers would have to pay an additional $69 billion per year. Adjusted for increased freight volume and inflation, that cost is probably close to $100 billion today.

So this push for re-regulation is not driven by market indicators. What we have, instead, is an effort on the part of some in the shipping industry to obtain competitive advantage through lower rates than the transportation market naturally supports. 

According to one proposal, the government should order railroads to use their tracks on behalf of competing railroads. Such “forced access” would allow companies dissatisfied with the prices they pay to ship products over rail lines to petition the government to intervene on their behalf.  

The STB has long had authority to do this in response to anticompetitive behavior that harms shippers served by a single railroad. And the STB also has authority to regulate rates charged to such shippers — precisely to ensure those rates are reasonable. Standing that logic on its head, some shippers now say they are having difficulty proving their rates are unreasonable or finding examples of anticompetitive conduct and so want the government to “fix” the regulatory system. Therefore, the argument goes, the STB should no longer require shippers to prove anticompetitive conduct and should give these companies another way to review rates. 

Though proponents of forced access describe such government intervention as “competition,” any market economist will tell you the opposite. Because railroads are a network, widespread forced access would create significant operational bottlenecks. Efficient movements of freight rail cars would be forced by government into inefficient movements with extra, unnecessary handling. And winners and losers among shippers would depend on geography.  

What’s more, the resulting decreased revenues would inhibit the ability of railroads to invest private capital to maintain and grow the rail network. And, of course, forced access would create disincentives for railroads to make future investment in new facilities. Why build new facilities if the government may one day order you to use them to help your competitor?  

Marc Scribner of the Competitive Enterprise Institute neatly summarized the implications of forced access. According to Scribner, the STB “is facing intense pressure from some shipping interests to adopt regulations that would reduce railroads’ investment, flexibility, and quality of service across their networks.” He concludes: “such action would not only harm the railroads, but ultimately the shippers who use their networks and the consumers who benefit from efficient goods movements.”

The last time the government tried something like this was in the 1970s. The result was a railroad industry on the brink of bankruptcy, unable to adequately serve its customers and the needs of a first-world economy. If the proponents of re-regulation are unmoved by economic arguments, they should pause to recall this history lesson. 

Jefferies is Senior Vice President for Government Affairs, Association of American Railroads.

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