The U.S. Senate seems poised to confirm three new members to the five-person Surface Transportation Board (STB), the agency responsible for regulating our nation’s railroads, including companies like CSX and Norfolk Southern in Pennsylvania. These nominations have been stalled for months, diminishing the STB’s ability to fulfill its mission to help ensure the free flow of goods. Slated for one of those seats is Philadelphia’s own Michelle Schultz, deputy General Counsel at SEPTA.
She will be coming to the STB at a crucial time. In recent years, the STB has proposed a radical change to its regulatory approach. At the behest of a powerful lobbying group, the STB is considering easing restrictions on a practice that permits government bureaucrats to require a railroad operator to allow traffic onto its private lines at potentially below-market rates. In Pennsylvania, which is home to a staggering 59 freight rail operators, expansion of forced switching, as it is called, could spell trouble for Keystone State businesses and consumers.
Since the 1980s, forced switching has been viewed as a last resort to prevent anti-competitive behavior by rail operators, but regulators have never found an incident of anti-competitive action that required forced access. In short, the type of behavior that forced switching is meant to prevent simply does not occur. The rail industry is highly competitive, and the STB’s own independent study found no evidence that operators were engaging in price gouging behavior or earning above normal profit.
A new study by the American Consumer Institute validates much of this analysis.
The proposal before the STB, which gives regulators broad discretion on how private rail carriers should operate, would greatly weaken this anti-competitive standard, making it easier for forced switching to be invoked. This would threaten the economic stability of the railroad industry, which supports more than 1 million jobs across the U.S. economy. Railroads serve a large number of major industries, such as construction, automobile manufacturing and retail, which in turn serve millions of American consumers.
From the American Consumer Institute’s analysis:
“Forced switching would limit negotiation between the parties, which would lead regulators to set prices… Shippers granted relief would be advantaged by lobbying for artificially low rates, while railroads would be potentially impacted by declining cashflows that are necessary to pay for operations, maintenance and investment… The new rules would return the railroad industry to its disastrous past when regulations nearly put the railroads out of business.”
The historical record confirms the devastating impact that over-reaching government regulations can have on the rail industry. For most of the 20th century, strict government rules had controlled rail routes, rates, and the use of investment. By the 1970s, the regulatory burden had become so onerous that industry returns on investment averaged only 2.4 percent and several major carriers faced imminent bankruptcy.
In response, Congress passed landmark legislation allowing rail carriers more control over their operations. The industry soon experienced an unprecedented recovery, including strong productivity growth and a dramatic decline in rail rates. Consumers still enjoy approximately $10 billion in annual benefits because of these reforms.
Moving forward with the STB’s plan to expand government involvement in private economic dealings (separate from safety regulation) would jeopardize these gains and re-institute a failed regime of government intervention. When Philadelphia’s Michelle Schultz is confirmed, she and the other STB members should reject any such proposal unless and until credible evidence of a market failure is presented. Doing otherwise would amount to regulatory malpractice and a dear cost to consumers.
Published in The Intellegencer.