Recently proposed regulations, like the bill put forward by Senator Baldwin in June, risk repeating past mistakes that will increase the cost of freight rail shipping, introduce poor investment incentives, and increase consumer prices. Instead of increasing the authority of the Surface Transportation Board (STB) to micromanage the freight rail industry, regulators should take a lesson from the past and consider reducing the STB’s authority thereby encouraging investments in efforts to boost productivity and safety.
The history of freight rail regulations can be described by what happened prior to and after the passage of the Staggers Act of 1980 when the industry was deregulated. Early on, regulations on freight rail had increased for a century, culminating in a near-total collapse of the industry. After the Staggers Act was passed, investments, productivity, and safety all dramatically increased while shipping prices fell.
Four recent proposals would expand regulators’ authority again including an executive order, a proposal from STB, and three pieces of legislation – The Freight Rail Shipping Fair Market Act, the Reliable Rail Service Act, and a bill introduced in June from Senator Baldwin. Each would increase STB’s authority over freight rail companies in harmful ways like regulations before the Staggers Act.
The proposal from the STB would increase its authority over revenue adequacy requirements. This would give the STB more control over freight rail prices based on its determination of a fair rate of return on a company’s investments. Like ‘rate of return regulations’ of the past, if a company invests more it is allowed to earn more, even if the investments aren’t useful. If this occurs, prices for shipping will rise, encouraging shippers to switch to trucks and other modes of freight transportation. Previously, this created a feedback loop. As prices increased shippers switched to trucks necessitating even higher prices, causing a death spiral for the freight rail industry in the 1970s and a run of bankruptcies.
Some requirements are proposed in the name of safety, such as two-person crews. But there is no evidence that mandated two-man crews will increase safety. Two-person crews are already standard for all large railroads. The recent derailment in East Palestine had a three-person crew at the time of the accident. The main cost of this will fall on small railroads and will ultimately raise shipping costs. Deregulation is what led to increases in safety after 1980 and by many metrics freight rail just had its safest year.
Both President Biden’s executive order and the STB proposals would increase the STB’s power to force reciprocal switching agreements. This is when one rail company is required to allow others to use their private infrastructure. When this occurs, it disincentivizes track operators from investing in their infrastructure and competitor investments, thereby limiting innovation and industry growth. The telecommunications industry provides a clear example of the failure of open-access regulatory policies.
Senator Baldwin’s bill would increase the STB’s authority to manage freight rail operations including train schedules, employment levels, equipment availability, and more. Ultimately, these requirements drive up the cost of shipping, which is then passed on to customers at higher prices for the goods they buy. Instead of serving consumers, the bill would grant advantages to shippers to engage in rent-seeking and use the STB force shipping terms on rail providers. While the bill looks to improve safety, by cutting rail investments the exact opposite will occur.
Similarly, both The Freight Rail Shipping Fair Market Act and the Reliable Rail Service Act expand the STB’s authority, which will in turn increase rail costs. As rail costs increase and more freight moves to trucks, pollution will increase as well as taxes to support deteriorating roads and bridges.
History shows that, prior to the passage of the 1980 Staggers Act, regulatory costs led to a string of bankruptcies. Then, immediately after passage, investment returned, and productivity and safety increased while the cost of shipping fell. The regulations proposed here risk repeating the same mistakes that nearly crippled the freight rail industry and would increase shipping costs at the expense of productivity, safety, and consumer interests.
Regulators should consider how to encourage investments while saving consumers money by lessening regulatory controls over the freight rail industry.
Justin Leventhal is a senior policy analyst for the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, visit www.TheAmericanConsumer.Org or follow us on Twitter @ConsumerPal.