Proposed Rail Regulations Could Make Consumers Big Losers

Competing railroad lines have recovered from near-bankruptcy in the 1970s, and today they perform the heavy lifting in our transportation networks. Through an investment of $635 billion since 1980, the railroad freight system has served American consumers very well. Within 10 years of regulatory reform, rail prices fell by 44 percent and productivity soared.

Unfortunately, a federal agency is planning to upset the successful operation of this industry and take it back 40 years. The result will hurt consumers.

U.S. railways carry 40 percent of our intercity freight, and rails’ operating efficiency helps keep consumer prices low. Railways are a capital-intensive industry whose maintenance requires massive annual investments to keep the rail system safe, efficient and compatible with new innovations in transport. The railways have diligently made those capital investments. In an American Society of Civil Engineers study of infrastructure maintenance for the 15 essential U.S. infrastructures, U.S. railways earned a B rating — higher than any other type of U.S. infrastructure.

As the Association of American Railroads pointed out, “freight railroads operate overwhelmingly on infrastructure that they own, build, maintain, and pay for themselves.” Despite that righteous tradition and without convincing reasons, the U.S. Surface Transportation Board is considering whether it should force incumbent railways to widely offer some competitors a privilege called reciprocal switching.

Under reciprocal switching, an incumbent railroad must handle the cars of its competitor, for a fee, so that the competitor can offer its shipper a single-line rate for the requested trip, even though the competitor’s line may not include the shipper’s location or the trip’s destination. Reciprocal switching allows a competitor, whose lines cover less than its shippers need, to puff itself up by instantly borrowing the most germane line assets of its incumbent competitor.

For pricing of this major accommodation, the STB is considering fees that do not cover the incumbent’s fixed and variable costs on a prospective basis. That becomes a disincentive for both incumbents and competitors to invest.

Even if the reciprocal switching fee covered its full costs, the incumbent could be severely harmed if reciprocal switching encumbered capacity that the incumbent needed to service a large contract with one of its shippers. Inefficiency will lead to congestion and raise costs.

The STB’s proposal – which could move quickly when the board is fully staffed following appointments from the Trump administration – forces the incumbent to abandon the competitive advantage of having prudently chosen to build and maintain the specific route. Most galling and damaging, the proposal would force the incumbent railway to subsidize its competitor. If enacted, the effect of reciprocal switching would, according to the AAR, prevent railroads from earning “enough revenue to invest sufficient funds back into the nation’s rail network and expand capacity while meeting the needs of a growing economy.”

Choking back revenue and preventing expansion to accommodate growth will undermine the benefits that flow to consumers, a major reason the American Consumer Institute recently joined 24 other organizations to oppose the proposed regulation.

Even the infamously destructive Interstate Commerce Commission, which preceded the STB, was wise enough to avoid socializing the assets of one railway in order to promote the interests of another.

As an STB chairman noted in 1998, the ICC reserved reciprocal switching only as a remedy when a railroad “used its market power to extract unreasonable terms or because of its monopoly position [has] shown a disregard for the shipper’s needs by rendering inadequate service.” Those misbehaviors are not happening in the rail industry today, making the possible government intrusion even more questionable.

The STB’s current proposal to make reciprocal switching a widely applied remedy is not backed up by customer complaints. On the other hand, competing railways are naturally envious of the railway lines owned by incumbents, and they would gladly avoid the investment in land, lines, and maintenance if they could use incumbents’ lines for nominal fees. Competitive envy and cost avoidance are insufficient justification for hijacking the benefits of earned incumbency.

Consumers deserve to keep the efficiency and effectiveness of today’s rail systems and railways’ good behavior does not justify the imposition of reciprocal switching price controls. Re-instituting onerous regulations will only create rail inefficiencies and higher costs. That does not help shippers and certainly not consumers.

Alan Daley writes for the American Consumer Institute.

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