Railroading Congress

Iain Murray Contributor
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On May 5, Sen. Jay Rockefeller (D.-WV) announced that he was “committed” to passing a bill to re-regulate railroads by the end of the year. Such a bill would reduce the railroads’ ability to charge market rates for their services and reverse one of the most successful deregulatory initiatives of the past 40 years. At a time when railroads are just about beginning to become viable again, this would be a major blow to this vital transport industry.

For nearly a century before 1980, the rail industry had been subject to massive overregulation, which even the Carter administration recognized was crippling the railroads. That year, Congress finally revived the then-moribund freight industry by passing the Staggers Act, which released rail companies from many of the regulatory restraints which had long hindered their ability to invest capital profitably.

Sen. Rockefeller’s new regulations—supported by industries that rely on shipping—threaten to turn back the clock on much of this progress. The two bills under consideration in the Senate—both of which are either sponsored or supported by Sens. Rockefeller, Kohl, and Dorgan—would impose inefficient “open access” policies on freight rail companies. This would force them to share their property with other carriers, subject them to antitrust oversight by the Federal Trade Commission, and give a more interventionist mandate to the Surface Transportation Board. This will lead to higher prices for consumers and an enfeebled rail shipping industry.

Proponents of “reregulation,” galvanized by the reports of “scandalous” profits following recent price increases, point out that there are now only four major national carriers, and argue that a number of “captive shippers”—those located in areas where only one rail line is in operation, and where other affordable means of shipping are unavailable—have suffered disproportionately from these price hikes.

But this is a caricature. “Captive shippers” are not subject to the merciless whims of rail industry executives. The STB already limits how far above variable costs rail suppliers are allowed to charge. The Board also regulates mergers and acquisitions, and has already begun to set tougher standards, calling in even minor acquisitions for review.

On a more fundamental level, reregulation ignore the structural peculiarities of the rail industry. Railroads have large, common, sunk costs (amounting to 25 percent of total costs), and must be able to recoup these costs in order to stay in business and make new capital investments.

The most economically efficient way railroads to recoup these costs is to charge shippers who have fewer shipping options for a greater portion of the fixed costs, and set lower prices for shippers with multiple shipping options, such as trucking or water-borne shipping. If railroads charge too high a percentage to shippers who have other options available, those shippers will avail themselves of those options. That, in turn, will result in even higher prices for “captive shippers.”

Finally, although “price discrimination” sounds unfair at first blush, it is a generally accepted practice used by many industries—without much notice or complaint. Movie theaters, for example, offer lower ticket prices for matinees than for evening shows. Restaurants charge less during early bird specials. Bars charge less during happy hour. And airlines charge an array of prices for seats on the same flight.

Freight rail plays a very important role in America’s economy. It supplies industry with raw materials, businesses with merchandise, and consumers with goods they need. If the knee-jerk, interventionist legislation under consideration is passed, “captive shippers” will enjoy lower prices, but only in the short term.

In the long run it will reduce the competitiveness of the rail industry and discourage capital investment. This will result in higher prices not only for “captive shippers,” but for consumers as well. If Sen. Rockefeller has his way, we could be mired in recession for decades.

Iain Murray is Vice-President for Strategy and Roger Abbott is a Research Associate at the Competitive Enterprise Institute.