Sensible economic rail regulation
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When it comes to regulating freight railroad rates and service, there are two truisms to consider.  

First, some shippers, such as farmers or manufacturers, sometimes lack multiple rail shipping options. And challenging rates through available options at the federal government is a laborious, inefficient and expensive process.

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On the flip side, however, freight rail transportation is an essential part of the United States economy and infrastructure network. Blunt force regulatory action is not only unnecessary, but would be counterproductive to improving outcomes for shippers and railroads alike, and would be in direct conflict with the deregulatory agenda favored by the current administration.

At issue is a prolonged debate that has pitted industry against industry. More specifically, a debate between a segment of companies and industry groups who use rail to ship products, and the private rail carriers who own and maintain the network. The squabble dates back as far as 1980, when Congress partially deregulated the rail sector – allowing it greater freedom to set rates and run operations with minimal government interference – but now is contested in earnest at the Surface Transportation Board (STB), an independent agency of the federal government responsible for resolving railroad rate and service disputes and reviewing proposed railroad mergers.

With the U.S. Senate confirming two new Members to the Board in January and expectations for the White House and Senate to imminently fill the two remaining vacancies, policy debates previously on a bridge to nowhere may soon find solid ground.

The STB must address a few fundamental issues such as assessing competition in the market, the rate dispute process, and service quality for rail shippers. The most pressing regulatory matter though will be a concept known as reciprocal switching, or as the railroads deem it, forced switching. As the American Action Forum summarized the issue:

“In some cases, a given shipper’s facility is served by only one railroad, but another railroad can more efficiently move its goods. Under reciprocal switching, the shipper can use the second railroad further away. For this to happen, the second railroad pays the nearer railroad to ship the goods until it reaches the second, and at that point the cars are transferred. Reciprocal switching occurs naturally in the market and allows shippers to lower their costs. The STB also has authority to require it, though has yet to do so since adopting its applicable regulations in 1985. Because of this, a group of shippers petitioned the STB in 2011 to propose a rule that would make it easier to impose reciprocal shipping in cases meeting certain criteria.”

Put forth in 2016, that proposed rule still lingers today. The new-look STB Board can vote to proceed with a regulation to impose switching on railroads more frequently, or the STB could decide to scrap the idea altogether. Before deciding such an issue however, the STB will likely seek public comment on this issue.

Instead of imposing such a draconian result that runs counter to the deregulation atmosphere intended, the STB should consider abandoning the proposed measure and instead focus on focused reforms streamlining the Board’s rate adjudication processes. Advocates for widespread switching, a major shift in policy, are moving the goal posts, cleverly attempting to use this complicated government scheme to extract lower rates.

While not always a staunch supporter of rail, it must be said that running a railroad is complicated, and history indicates government control of rail routes and pricing is a perilous endeavor. The transportation market for shippers, which includes trucks, pipelines, and barges for many products, is an existing ecosystem best suited to ensure optimal outcomes. This is especially true given that the STB provides backstops for shippers, including strict rate oversight in the absence of pervasive competition.

In truth, the debate between rail shippers and rail carriers can be distilled even further. Shippers would prefer railroads be fully regulated utilities, subject to overt government rate regulation across the industry, while railroads would prefer to operate in free markets like many of their competitors, such as the trucking industry. Given the remarkably poor track record of Uncle Sam running enterprises or micromanaging sectors – including the railroads for the most part from 1920 – 1978, which nearly exterminated U.S. freight railroads – the choice is clear.

Some, including Roslyn Layton of the American Enterprise Institute, suggest we should consider abolishing the STB altogether. Yet in this case, the middle ground of sensible economic regulation is the best path. Shippers and railroads deserve oversight, but for the sake of the economy, that refereeing must not usurp free market forces and become burdensome.

Brigham A. McCown is a former federal government safety regulator, adjunct professor, and the founder of the non-profit Aii.org. You can follow him on Twitter and Facebook.