Proposed rail regulations are bad for consumers, workers and the environment

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America’s railroads provide cost-effective freight transportation for consumers and thousands of jobs for workers – all while generating a fraction of the emissions of its competitors compared to trucking, according to a new report by the American Consumer Institute. Regulatory reforms that took place some 40 years ago yielded about $10 billion in consumer benefits each year. These benefits are the product of a regulatory system that allows markets to work where appropriate while providing government oversight in the minority of instances where there is insufficient competition.

However, proposals to increase regulations pose a serious threat to rail investment and long-term consumer benefits. Among the proposed Surface Transportation Board (STB) regulations are two that would put downward pressure on railroad prices (EP 755 and EP 756) and two that would negatively impact railroad earnings (EP 761 and EP 664) – all of which would hinder future rail investment. These rules, if implemented, would give the STB the authority to mimic much of the same onerous regulations that existed pre-1980, and do so without congressional authority.

In the last decade, there were only three instances where a particular shipper had a rate complaint with a particular railroad carrier regarding a specific commodity that led the STB to find the rate to be unreasonable. It is not clear what problems the STB proposes to fix.

Typically, regulations are rationalized as efforts to address market failures. However, when looking at elements of the structure of railroad markets, conduct, and performance, there is no clear market failure to point to. Instead, we see healthy industry investment, modest profits, and stable pricing. If fact, a graph of the empirical evidence demonstrates that railroads are much less profitable than most other industries. As such, there is no compelling evidence of the exertion of market power nor market failure that would justify a regulatory solution.

Why then is there a push for increased rail regulations?

Rent-seeking, special interest groups, lobbyists and those with vested interests are currently pressuring the STB to impose onerous rules that would lower rail shipping costs for their direct financial benefit. Should regulators be swayed to give these lobbyists a regulatory handout?

If you look at the profitability (what regulators refer to “revenue adequacy”) of one of the groups pushing for lower shipping prices, the American Chemistry Council (ACC), shippers are collectively not in need of corporate welfare. In fact, using the STB’s own method to calculate revenue adequacy (return on investment minus the cost of capital), a chart of the ACC’s S&P 500 members versus Class I railroads shows they were extraordinarily profitable.

The financial data for the same companies compared to Class I railroad carriers shows that railroads produce twice the cash flow per dollar of revenue and that this higher cash flow produced a higher percentage of investment, all while railroad carriers produce twice the number of jobs per dollar of revenue. It would appear, shippers, collectively, are not converting their superior profits into additional investment and not creating more jobs, compared to railroads.

While lobbying and rent-seeking might make financial sense for shippers, it does not serve the public interest, and the STB should resist the temptation to impose onerous regulations on railroad carriers.

Undermining railroad investment is a dangerous risk that could eventually lead to underperformance by railroads, produce financial losses, and increase market shares for the trucking industry. As trucking increases, environmental concerns increase along with congestion and added pollution. Compared to trains, trucks create three times more pollution per ton. By one estimate, taxpayers will face $64 billion in costs to pay for highway improvements. Keep in mind that rail invests in its own tracks and bridges, while trucks depend on taxpayer funding.

Overall, regulations will negatively impact shippers, consumers, workers, taxpayers, and the environment. As these regulations take hold, the rail market’s cashflow would suffer serious consequences and society will be much worse off.

Flexibility and ingenuous investment have been the key to the revival of America’s railroad system. But the proposed measures before the STB stand to disincentivize investment and slash consumer benefits. The STB should put consumers, workers, and the environment ahead of vested interests.

Steve Pociask is president and CEO of the American Consumer Institute, a non-profit educational and research organization. For more information about the Institute, visit www.TheAmericanConsumer.Org or follow us on Twitter @ConsumerPal.

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