With the new Trump administration beginning to taking shape, regulators of every stripe will soon be looking for ways to trim red tape.
But apparently, that doesn’t include the railroad regulators at the little-known Surface Transportation Board. The board, created in 1996 to replace the obsolete Interstate Commerce Commission, is considering a costly set of new rules, with the final round of public comments being received in October.
The proposed regulations would expand the range of circumstances in which railroads would have to offer “reciprocal switching”—that is, the provision of access by one railroad to the tracks of another. Such access can be mandated today by regulators only under very limited circumstances. The Surface Transportation Board argues that an expansion of reciprocal switching would increase competition among the railroads.
But, in reality, such forced access only adds inefficiencies and imposes needless costs on rail networks. And railroads would not be the only victims. Since railroads account for nearly 40 percent of U.S. intercity freight measured in ton-miles, the costs of any new regulation would be passed on to shippers, retailers, and consumers as well.
We need not look very far back in history to be reminded of the adverse effects of regulation, which once nearly killed freight rail service entirely. Until 1980, railroads faced a dense web of crippling regulations imposed by Washington.
The Interstate Commerce Commission, established in 1887, set price levels, approved the addition of new routes and removal of old routes, and limited mergers between rail companies.
Of course, in the early years of the commission, rail dominated the freight transportation industry, due to a lack of better alternatives. But by the mid-1970s, in the face of stiff competition from trucks, railroads faced a dismal future.
Industry-wide income had fallen from $5.3 billion in 1929 (measured in 1977 dollars) to $343 million in 1977. The return on investment for railroads never broke 2.9 percent, at a time when the average savings account offered a 5.5 percent return.
Six major rail companies went broke during the 1970s, the most prominent of which was Penn Central Transportation Company. Its demise triggered the collapse of smaller railroads across the Northeast.
Scrambling to preserve the industry, the federal government purchased all the failed railroads and in their stead created the Consolidated Rail Corporation, or “Conrail.” The intervention cost taxpayers $7.7 billion.
As railroad revenue plummeted, track maintenance was allowed to lapse. By 1976, more than 47,000 miles of track required reduced speed limits, some as slow as 10 miles per hour. The maintenance problem grew so bad that safety analysts had to invent the term “standing derailment” to describe accidents where a stationary train car simply fell off a deteriorated stretch of track.
Prospects reversed when Congress passed the 1980 Staggers Rail Act, which largely deregulated the rail industry. According to the Association of American Railroads, “Staggers ushered in a new era in which railroads could largely decide for themselves what routes to use, what services to offer, and what rates to charge.” Since then, “average rail rates have fallen 45 percent … rail traffic volume has doubled, and railroads have poured more than $600 billion … back into their systems.”
Given the near collapse of the whole industry, it is somewhat alarming that the Surface Transportation Board seeks to expand regulation once again, making it easier for railroads to force competitors to give them access to their privately built lines.
Proponents of the Surface Transportation Board’s reciprocal switching rule claim it is necessary to promote competition in areas where only one rail company has access. But because railroads have such high fixed costs, in most places there is not nearly enough demand to support the presence of two rail lines.
And while some may argue the absence of competition could drive up shipping prices, no shipper has filed a complaint about prices since 1981 or been granted a reciprocal transfer request since 1985.
“If enacted,” the Association of AmericanRailroads warns, “railroads will not be able to earn enough revenue to invest sufficient funds back into the nation’s rail network and expand capacity while meeting the needs of a growing economy.”
Increased regulations on the rail industry are not in keeping with the successful reform of the rail marketplace implemented by the Staggers Rail Act 37 years ago. The Surface Transportation Board, created out of the rubble of the old regulatory regime, should be wary of imposing new mandates on today’s rail carriers.
