America’s railroads provide cost-effective freight transportation for consumers and thousands of jobs for workers—all while generating a fraction of the emissions of its competitors. These benefits are the product of deregulation in the 1980s that slashed inefficiency and brought the railroads back from the brink of collapse.
However, a new report highlights how these public benefits are once again coming under pressure from proposed onerous regulations. History shows that price setting and regulatory meddling will eventually extinguish the benefits that rail transportation affords.
While the rail industry’s success today can be attributed to its efficiency, it wasn’t always the case. Increasing regulation throughout most of the 20th century—which set prices and forced carriers to maintain unprofitable routes—resulted in a wave of bankruptcies. It wasn’t until the mid-1970s and the passage of the Railroad Revitalization and Regulatory Reform Act (1976) and the Staggers Rail Act (1980) that the industry became leaner and more competitive. The increased flexibility that flowed from these reforms provided approximately $10 billion worth of annual benefits to consumers.
A recent report written by my colleagues at the American Consumer Institute details how history unfortunately risks repeating itself. Four proposals to increase the powers of Surface Transport Board (STB) regulators would chip away at the dynamism of the railroads. Rather than serving consumers, these proposals would dampen the rail industry and provide the companies that back the reforms with a handsome pay day.
The Final Offer Rate Review (EP 755) proposal, for example, would empower the STB to set prices based on the final offer of either a railroad or a company seeking to ship its products. The likelihood that either offer is actually the fair market price is slim, meaning that an inefficiency would be almost guaranteed. Moreover, the proposal would fix a price gouging problem that simply doesn’t exist; in the past decade only three rate disputes brought before the STB were found to be unreasonable.
Similarly, the Market Dominance Streamline Approach (EP 756) proposal would make it easier for shippers to establish a prima facie case that a carrier has a market dominant position for a specific rail route. This would empower the STB to further intervene in the price setting process.
In addition to price setting proposals, the STB is also taking aim at the profits of the industry. The Revenue Adequacy (EP 761) proposal would establish a cap on the rate of return on invested capital for railroads. The rule would effectively constitute a tax on efficiency, to the benefit of the companies that ship their products along the railroads.
Meanwhile, the Cost of Capital Revision (EP 664, Sub-No. 4) proposal seeks to revise the way the STB calculates the industry’s cost of capital. With the stroke of a pen, a revised definition could invent a theoretical lower cost—albeit divorced from reality. Coupled with a rate of return cap, this would severely hamper the profitability of the rail industry.
Flexibility and ingenuous investment have been the key to the revival of America’s railroad system. But the proposed measures before the STB stand to disincentivize investment and slash consumer benefits. The STB should put consumers, workers, and the environment ahead of vested interests when it comes to railroad regulation.