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Capitol Comment 225 – Rails and Wires: What’s the Difference?

As Congress takes up reauthorization of the Surface Transportation Board, lawmakers will surely hear from rail shippers who want expanded “competitive access” for railroads. The basic idea is to treat railroad tracks the same way the 1996 Telecommunications Act treats local telephone wires – as facilities open for use by all competitors at a regulated rate. Under this concept, a shipper served by only one railroad could expand its options by forcing that railroad to let competing railroads use its track.

Not too many people in the United States have proposed competitive access for all railroad track, but some shippers and legislators want to make competitive access available to “captive shippers” served by only one railroad who lack other transportation alternatives. Proponents suggest that since local telephone companies must let competitors use their monopoly facilities at a regulated rate, why not do the same thing for railroads?

Rail access is already regulated. The Surface Transportation Board currently has authority to order competitive access in situations where a railroad is abusing a captive shipper. The Board’s competitive access guidelines state that it will impose competitive access when a railroad is offering inadequate service or using its control of its facilities to prevent a more efficient railroad from serving a captive shipper.

This policy is somewhat different from the competitive access policy in telecommunications because it is selective. Telecommunications legislation and regulation assumes that local wires are monopoly facilities unless proven otherwise; therefore, these wires must be open for use by competitors. Until recently, this assumption made sense, because local telephone companies have historically enjoyed monopoly franchises that prevented competitors from entering their markets.

Railroads, in contrast, face a great deal of competition for most of their traffic. Only selected shippers in particular locations are “captive” to a single railroad. Accordingly, current railroad regulation is tailored to address particular situations where monopoly power could be abused, and regulators require proof of abuse before they act.

Shippers have other regulatory options. Proposals to expand competitive access in railroad also ignore another key difference between railroad and telecommunications regulation. The Surface Transportation Board has authority to regulate the rates charged to any “captive shipper” for the entire length of the haul, from origin to destination. This means that the Board regulates not just the rate charged over the portion of track where a railroad might have a monopoly, but also on any portions of the haul where alternative transportation is available. A rate is considered unreasonable if it exceeds the shipper’s “stand-alone cost.”

Regulators in telecommunications do not have similar authority; only the local portion of a phone call travels under regulated rates. Long-distance rates are determined by competition, not regulation. In this sense, rail rate regulation for captive shippers is more extensive than in telecommunications. Shippers who cannot get competitive access thus already have another remedy.

An ineffective means? It is a well-established principle of regulatory economics that the economically efficient regulated price for competitive access must compensate the owner of efficiently managed rails or wires for the net revenues the owner loses if someone else uses the infrastructure to provide the service.1 This compensation may be adjusted downward if the owner is operating with inefficiently high costs, but railroads’ substantial cost reductions since 1980 suggest there is little or no fat left to cut. As a result, an efficient regulated price for access will not give shippers the rate reductions they seek. As a World Bank report on rail issues noted, “[Efficient] pricing of bottleneck facilities does not place additional competitive pressure on pricing to shippers, since it is based on the contribution that could be earned from the shipper’s service at the extant shipper’s price.”2 This theory was borne out by litigation over the prices New Zealand Telecom charged competitors for access to its network. Courts upheld economically efficient prices that were much higher than government officials thought reasonable.3

If the regulated access price fails to compensate the track owner for its lost revenues, then some shippers may get lower rates, but there is no guarantee that the most efficient railroad actually moves the freight. This type of inefficiency is exemplified in telecommunications by ongoing U.S. litigation over access pricing. The system that emerges from this morass will likely involve a mix of efficient competitors who deserve to thrive and inefficient competitors who survive only because quirks of price regulation create special niches where they have artificial advantages.

For these reasons, competitive access offers no free lunch. It can only give captive shippers the rate reductions they seek by reducing the efficiency of the U.S. rail system, harming other shippers and consumers in the process.

1William J. Baumol and J. Gregory Sidak, Toward Competition in Local Telephony (MIT Press, 1994), pp. 95-109.

2Ioannis N. Kessides and Robert D. Willig, Restructuring Regulation of the Rail Industry for the Public Interest (World Bank Policy Research Working Paper, Sept. 1995), p. 29.

3Michael Pickford, “Information Disclosure, the Baumol-Willig Rule, and the ‘Light-Handed’ Regulation of Utilities in New Zealand,” New Zealand Economic Papers (1996), pp. 199-218.