Proposed US federal railroad regulations ignore economic realities and historical lessons learned — and consumers will pay the price, according to a new report from the American Consumer Institute.
Reforms to US railroad regulations in the late 1970s that ended route and rate controls reinvigorated an industry that was on the brink of financial collapse with many notable rail bankruptcies, such as the Penn Central Transportation Company. After decades of harmful government regulation, prices were soaring, even as service quality declined.
Since railroad deregulation, freight rates have decreased by 45 percent. Economists estimate that these regulatory changes delivered massive benefits, saving consumers up to $10 billion annually.
Despite these gains, the Surface Transportation Board (STB), the agency in charge of overseeing private US freight railroads, has taken steps to impose onerous regulations on railroad operators that would erase much of the industry’s progress over the last 40 years.
The STB is considering a proposal to ease restrictions on forced switching, a practice that requires a railroad operator to allow competitors to dump traffic onto its privately owned and maintained rails at potentially below-market rates. Forced switching has historically been viewed as a last resort to protect captive shippers from anticompetitive actions by railroads; and since its inception, regulators have never found sufficient reason to invoke this remedy. Not once.
However in 2011, at the behest of a lobbying group, the National Industrial Transportation League, the STB opened a proceeding to consider making forced switching easier to use as a regulatory intervention. In 2016, the STB issued an order on forced switching in line with what the lobbying group had requested. Making matters worse, the language of the proposal is so vague and imprecise that it opens the door to wide regulatory discretion.
No evidence regulatory measures are needed
Let’s be clear: there is no evidence that these regulatory measures are needed to correct a market failure in the railroad industry. Competition in the industry is intense; shippers use various competitive rail lines as well as other modes of transport — trucks, airplanes, pipelines, and ships/barges — all of which keep shipping prices low for consumers. In fact, average railroad prices have not increased as fast as the prices of other goods and generally have increased at a slower pace than other forms of transportation.
Interestingly, the STB’s own independent economic analysis found no evidence of price gouging by railroad operators and warned that forcing competition would likely “threaten railroad financial viability.”
Fundamentally, forced switching compels railroad operators to subsidize would-be rivals and shippers through below-cost wholesale rates, irrespective of the relationship between expected costs, revenues, and cash flows.
Imposing forced switching rules would create ambiguity, reduce transparency, and make forecasting costs and revenues more difficult. Short-term regulatory decisions do not create an environment conducive for investments that last many decades. As a result, investment in the rail industry would decline, along with a decrease output and a deterioration in service quality and safety. Rising rail prices would lead shippers to rely more on trucking, which would increase the cost of highway maintenance borne by taxpayers, as well as lead to adverse environmental consequences.
In the end, consumers will pay more for less.
In light of these risks, the STB has a responsibility to offer the public a clear and transparent economic justification for its actions. Without some evidence of systematic market failure, implementing these new rules would amount to regulatory malpractice — regulating for the sake of regulating. The STB should remember the lessons of history and the high costs unnecessary regulations impose on consumers.
Liam Sigaud is writer for the American Consumer Institute, a nonprofit educational and research organization.