Chicago Daily Herald: New Railroad Regulations Would Jeopardize $10 Billion in Annual Consumer Benefits

Slated to join the U.S. Surface Transportation Board (STB), the primary agency tasked with overseeing the financial functions of private U.S. freight railroads that maintain an outsized presence in Chicago, is former Metra Chairman Martin Oberman.  If confirmed – likely in the lame duck session in the U.S. Congress – Oberman will need to deal with a proposal that could lead to a $10 billion annual increase in costs for consumers.

The effects in Chicago, home to roughly 25 percent of all rail traffic and 500 daily freight trains, the effects could be particularly negative.

In the 1970s, burdened by decades of misguided government regulation, the U.S. railroad industry faced imminent collapse. In response, Congress passed legislation to alleviate the regulatory stranglehold and restore market forces to the railroads. Controls on rail routes and rates were abandoned, leading prices to drop sharply. Today, inflation-adjusted prices are 45 percent lower than in 1980, and railroad productivity has surged.

But now, the STB, at the behest of a powerful lobbying group, is considering easing restrictions on a practice known as forced switching, which requires a railroad operator to allow traffic onto its privately-owned and -maintained rails at potentially below-market rates.

For the past several decades, forced switching has been viewed as a last remedy to prevent anti-competitive behavior by rail operators. Over the years, regulators have not found a single incident of anti-competitive action that required the need to force such arrangements.

But the proposal before the STB, which contains vague and unclear language that invites wide regulatory discretion, would greatly weaken this anti-competitive standard. This would quite clearly jeopardize the economic stability of the railroad industry, which serves a vast swath of major industries, which in turn serve American consumers.

When used appropriately, government regulations can promote competitive behavior and correct market failures. But there is no indication that such problems exist in the railroad industry. In fact, an independent economic analysis commissioned by the STB, the Christensen Report, found no evidence of price gouging and noted that Class I operators “do not appear to be earning above normal profit.” The study concluded that the industry is ultimately competitive.

While there are only seven large Class I operators in the U.S. (and hundreds of local/regional operators), that market concentration permits significant economies of scale, which means that large operators – like BNSF or Union Pacific operating in Chicago – have lower direct operating costs per mile than smaller operators. These lower per unit costs ultimately enable lower consumer prices.

The STB’s proposal is further undermined by the fact that railroad prices have increased more slowly than all other modes of transportation, apart from trucking.

Before new regulations are imposed, the STB has an obligation to the public to offer an economic justification for its actions. Unless there is credible evidence of systematic market failure to show otherwise, bureaucratic intervention is likely to do more harm than good.

This is no time to reverse the progress the railroad industry has made over the last 35 years. If these regulations go into effect, the railroad industry’s operating costs will soar, investment will plummet, and prices will increase. As a result, shippers will rely more on trucking to move freight, at an estimated cost of $1.4 trillion, causing more wear-and-tear on public roadways.

In short, shippers, taxpayers, the environment and the economy will be worse off if these regulations are adopted; and gone will be the $10 billion in annual benefits to consumers. That’s a big price to pay for Chicago and the U.S.