New Freight Rail Mandates Could Make the Supply-Chain Crisis Even Worse
President Joe Biden’s July 2021 executive order offered a sneak preview of his administration’s priorities for the freight-rail sector, particularly where it calls on the Surface Transportation Board (STB) to “strengthen regulations pertaining to reciprocal switching agreements.”
The STB is expected to move shortly — possibly as soon as a scheduled March 15 public hearing — to take up rules calling for mandated reciprocal switching, a form of compelled network interoperability, on grounds that they would improve the rail industry’s competitive environment. The regulations likely would be based on a six-year-old notice of proposed rulemaking (NPRM), which was, in turn, based on far older data.
Maddeningly, officials might adopt these counterproductive regulatory remedies based on both overblown and misdirected concerns about competition in the freight-rail industry. Critics will note, for example, that the number of “Class I” railroads — the largest, as assessed by the STB — has declined from 40 in 1980 to just seven today. While that is technically true, it is mostly because the STB has changed the category’s definition over the years; many of 1980’s Class I operators would not be classified as such today.
More importantly, the number of smaller railroads has boomed over the past four decades, while the share of track under Class I control has declined. In real terms, concentration in the rail sector has actually fallen.
There is vanishingly little evidence that the freight-rail industry suffers from insufficient competition. Shippers pay appropriate market rates, innovation is pursued aggressively, and infrastructure is maintained. If regulators were to act on the belief that a certain minimum number of Class I railroads is needed to foster competition, they would risk undercutting benefits to end-customers and shippers alike.
Under compulsory reciprocal switching — a proposed remedy for a market-concentration problem that doesn’t exist — rail operators would be guaranteed access to each other’s otherwise private infrastructure. This means a railroad that has a line to a given shipping facility would be compelled to route traffic from other railroads to that facility.
This might appear reasonable on its face, as railroads are already heavily integrated and frequently undertake private switching arrangements. But unlike private agreements, compulsory access is not necessarily driven by economic efficiency. Mandated reciprocal switching would diminish railroads’ flexibility to seek the efficiencies that have allowed the industry’s capacity to grow dramatically since the turn of the 21st century.
The STB’s proposed rules could benefit shippers, but only insofar as it would function as a subsidy to shipping that would be financed by railroads and consumers. Reduced operational coherence for rail networks is a luxury the nation cannot afford in the midst of ongoing supply-chain disruptions.
And over the longer term, a reciprocal-switching rule could cut against the administration’s own competition and infrastructure objectives. Given that competition between freight rail and trucking is set to be transformed by the introduction of automated systems, it is crucial not to hamper railroads’ ability to operate at peak performance. This would place them at a sectoral disadvantage and could even drive demand for further consolidation in the sector.
Compelled interoperability also would dampen or erase price signals about the need for infrastructure investment. Inflexible per-car rates for exchange are a poor substitute for demand-driven switching arrangements. If the users of infrastructure are insulated from the full cost of that use, there will be a tendency for overuse and underinvestment, leading to neglect.
Consumers win when freight rail moves efficiently. Developments in automation and scheduling are poised to usher in just such an era of so-called “precision scheduled railroading” (PSR). The theory is that fewer, longer trains can be predictably operated to create both greater cost-effectiveness and greater capacity. Reciprocal switching would preclude railroads from realizing the benefits of PSR by forcing them to run shorter trains more irregularly, in order to accommodate access requirements. The benefits to shippers, and to labor unions seeking to offset staffing reductions made possible by automation, would come at the expense of consumers, who would pay more. There also would be detrimental impacts to supply-chain resilience and to the environment, due to the need to run more trains.
As the STB decides whether to move forward with its 2016 NPRM, begin a new rulemaking process, or defer action entirely, the last of these is the only course of action that comports with market realities and the nation’s infrastructure needs. Barring that, the STB should recognize how the world has changed in the last decade, and go back to the drawing board with a new proceeding.
Ian Adams is the executive director of the International Center for Law & Economics.
