American freight rail, while largely deregulated, is still overseen by the Surface Transportation Board (STB). This federal agency retains substantial power to regulate freight rail, powers that the STB normally deploys rarely. But these powers are seen by some as an opportunity to enlist the power of the federal government in business disputes, using government to extract rents to pad bottom lines. An example of this can be seen in the proposed “reciprocal switching” regulations from the STB. Unable to prove that prices that railroads are charging are unfair, some of their shipping customers have gone to the federal government to try to force lower prices through regulation, regulation which has been described as backdoor price controls.
The United States has the most developed and efficient freight railroad system in the world. In contrast to Europe, where the large majority of freight is moved by road, by weight and distance travelled freight rail provides the largest share of the transportation mix in the US. This is no accident. In 1980, recognizing the sclerotic and weak state of the heavily-regulated rail industry, a deliberate decision was made to deregulate freight rail. The subsequent recovery of the freight rail industry might seem to be a lesson in the value of reducing federal interference to the average person, but not to a regulator. Perhaps offended by their example, regulators in Washington have been hunting for ways to re-impose regulatory control over American freight rail.
Freed from the heavy hand of federal government micromanaging, freight rail in America has boomed, creating a system that is the envy of the world. To maintain this world-beating system, the rail industry since 1980 has invested about 17% of revenues in maintenance and expansion of rail networks. This investment amounted to $28 billion in 2014, an amount equal to more than half of total federal government expenditure on transit, highway, and airport construction and improvement programs. The removal of federal controls gave rail companies the incentive to make these investments. As owners of the tracks, in a less regulated market rail companies have every incentive to upgrade and expand their transportation network.
The new proposed reciprocal switching regulations from the STB threaten this efficient and high-functioning system. Under the current system, when a railroad customer is only served by one railroad and it believes that it is being gouged by the prices charged, the customer can go to the STB and ask for relief, provided it can prove anticompetitive actions. Such actions have never been proven, which tends to indicate that railroads are charging fair rates. Unable to show anti-competitiveness, shippers decided to get the federal government to change the rules, and the STB is going along with it.
The proposed reciprocal switching rules would force railroads to transport the cars of competing railroads on their own tracks, a proposal that comes with costs. First, adding in these extra car changes make freight rail needlessly more complex, threatening the efficiency of the overall system.
Second, the cars would be transported at below-market, federally-mandated rates, rates that do not take into account the investment cost of maintaining existing track. Forcing railroads to transport cars without being able to charge enough to cover maintenance and investment is precisely the system that so devastated the freight rail industry in the 70’s, and we can expect such damage again under this proposed regulation.
Put simply, this is a business dispute between the railroads and their shipping customers, and the STB should not be putting their finger on the scale in favor of one or the other. What’s more, the regulation is counterproductive: while it might provide a short term boost to the bottom line of shippers, long term it will impair the efficiency of freight rail and reduce investment in maintenance of the system. The STB should abandon its efforts to reregulate freight rail.