Re-regulation: Recipe for disaster

Re-regulation: Recipe for disaster

In a recent letter to the editor of The JoC, Glenn English, chief executive of the National Rural Electric Cooperative Association and chairman of Consumers United for Rail Equity (CURE), a Washington lobby that wants to re-regulate the railroads, asked: Given that the railroads asked for and received competition in 1980, why are they so afraid of it today?

The question assumes as an undisputed truth that which is open to challenge. Railroads did not "ask" for competition in 1980, already having far more of it than they could handle under the regulatory scheme then in place. They sought relief from the heavy hand of government regulation over their day-to-day business affairs. Regulation prevented them from competing against other modes that benefited from government construction and maintenance of the public rights-of-way they used.

Mr. English, a former Democratic representative from Oklahoma, plays the rhetoric game. He runs away from regulation, saying CURE does not seek to re-regulate railroads. CURE would do exactly that. He says off-handedly that "Congress can fix this problem (a claimed lack of competition) by injecting much-needed competition into the railroad industry."

Competition either exists or it does not. It cannot be injected into any industry unless someone makes an investment that would provide competition where it does not already exist. CURE wants government to give it what its members have been unable to obtain from the regulatory agency - the Surface Transportation Board - created by Congress to monitor and correct railroad abuses of market power.

The STB has criteria that determine if such abuse exists. Where competition exists, there is no rate regulation. Any rate that is less than 180 percent of variable cost is unregulated. If a rate is above 180 percent, and if the shipper establishes that the railroad has market dominance, then and only then can it pursue a complaint.

The Staggers Rail Act of 1980, which substantially deregulated railroads, has worked well for 27 years. It was the intention of Congress that those shippers that effectively are captive would pay a larger portion of railroads' fixed system costs than others not so dependent on railroads.

This is a column about intermodal issues, and that's where the efforts of CURE and the American Chemistry Council (ACC), which has allied itself with CURE, require a closer look.

Only in the last few years have rail earnings begun to reach the level that allows railroads to secure new capital to invest in improved service and increased capacity. If railroads are forced to set rates based on artificial competition, their return on investment effectively will be capped.

That would be bad for intermodal, the fastest-growing segment of rail business. If Mr. English and his cohorts have their way, his co-op utilities might pay a little less than they otherwise would to receive the coal they burn. But the railroads would be forced to slash their expansion plans.

Intermodal shippers rely on increasing rail capacity and better service. Except for the current economic slowdown, intermodal is faster growing than even coal. If railroads must reduce their capital spending, all shippers will suffer, and coal customers relying on rails even more.

Utilities will complain to Congress and anyone else who will listen that railroads refuse to honor their common-carriage obligation, as happened in 2005 when two derailments in Wyoming's Powder River Basin led to a huge rehabilitation program and temporarily reduced coal shipments. Neither CURE nor ACC, I'm sure, ever will testify before Congress that they are willing to pay more for the reassurance that railroads can invest in capacity.

If railroads must reduce capital investment, intermodal service will deteriorate. The same kind of congestion that has driven so much volume off the highways will infect railroads. In large part, intermodal is a creation of rail deregulation. Railroads have invested heavily in double-tracking key routes, contracting for new terminals and logistics centers. No shipper uses rail - or any other mode - because it likes the salespeople who call on it. They use intermodal because the price service-combination meets their need.

If CURE and ACC succeed, the improvements brought by deregulation will end. Railroads will return to the pre-Staggers era - and anyone old enough to remember that knows it was not a good time for railroads or their customers.