Incoming railroad regulators should protect consumer benefits

President Trump’s three nominees to the Surface Transportation Board (STB) – whose nominations have been in limbo for months – may soon be confirmed by the U.S. Senate. If confirmed, these nominees will be responsible for overseeing the nation’s railroads, an industry that supports about 1.5 million jobs and generates nearly $274 billion in annual economic activity.

They’ll have their work cut out for them. A new report by the organization I work for, the American Consumer Institute, details how a proposal by the STB threatens to harm the rail industry and erode billions of dollars in consumer benefits.{mosads}

The STB’s plan – known as “forced access” or “forced reciprocal switching” – would make it easier for regulators to require freight railroads to open their lines to competitors, regulate prices, and give preferential treatment to certain shippers. In effect, forced access compels railroad operators to subsidize would-be rivals and shippers through below-cost wholesale rates regardless of expected costs, revenues, and cash flows.

The rule changes contemplated by the STB would make forecasting revenues and costs more challenging for rail operators. Additional uncertainty would chill critical investment, leading to a decrease in economic output and service quality. Safety would suffer, too, as infrastructural improvements are delayed or abandoned.

In pushing for looser “forced access” rules, the STB is ignoring the lessons of history.

For much of the 20th century, federal regulators tightly controlled rail routes, use of investment, and prices. By the 1970s, several major carriers were on the verge of bankruptcy, and Congress faced the prospect of costly bailouts or a federal takeover of the U.S. rail system. Lawmakers acted boldly, repealing onerous regulations and allowing market forces to re-energize the industry.

In the 40 years since, industry productivity has more than doubled, investment has surged, and inflation-adjusted rail rates have decreased by 45 percent. Economists estimate that consumers reap about $10 billion in annual benefits from these reforms.

Some access rules were originally adopted in 1985 in order to prevent isolated anticompetitive behavior by rail operators. In practice, voluntary arrangements between rail operators have deterred anti-competitive actions and few complaints have been filed with regulators – none of which were found to justify forced access.

Despite the lack of evidence that regulators need greater authority to invoke forced access, the STB – at the urging of a lobbying group, the National Industrial Transportation League – released an order in 2016 making it significantly easier for forced access to be mandated. Amazingly, the STB cited the lack of forced access by regulators as an indication of a problem, even though that fact suggests the absence of a problem.

There is no reason to think that a market failure exists in the railroad industry that merits regulatory intervention. Competition in the industry is significant. In addition to competing with one another, rail operators face intermodal competitors as well, including trucks, pipelines and ships. As a result, rail rates are low and prices have increased at a slower pace than for other forms of transportation.

An independent report commissioned by the STB came to the same conclusions. Analysts found that rail operators do “not appear to be earning above normal profit” and warned that plans to force competition would likely “threaten railroad financial viability.” If that comes to pass, the $10 billion in annual consumer benefits resulting from decades-old regulatory reforms will vanish.

Forced access is costly and unnecessary.

If confirmed by the Senate in the next few weeks, the incoming members of the STB should recognize the lessons of history and oppose any effort to expand the use of forced access in the railroad industry.

Liam Sigaud works on economic policy and research for the American Consumer Institute, a nonprofit educational and research organization. Follow on Twitter @ConsumerPal.