Why Are Some Regulators Tempted To Fix What’s Not Broken?

REUTERS/Kim Kyung-Hoon

Alan Daley Writer, American Consumer Institute
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Federal regulators are considering the imposition of onerous regulations on the U.S. rail industry, including competition-busting rules that would require competitors to share routes at subsidies rates – called reciprocal switching regulation. Before looking at the problem that regulations would create for consumers, it is helpful to review the long history of rail regulation and historical reforms – something that regulators need to understand.

Over almost a century, the Interstate Commerce Commission (ICC) imposed regulations on railroads that dictated what could be shipped and at what price, prevented abandonment of unprofitable routes, thwarted mergers, discouraged competition between railroads and set rates that prevented effective competition against the long-distance trucking industry. By the late 1970s, it was evident to Congress and most US shippers that excessive regulatory controls were causing financial pain and inefficient operations for the railroads. The rail industry was going bankrupt.

To allow the industry to restore its vitality and efficiency, Congress passed the Railroad Revitalization and Reform Act of 1976 and the Staggers Rail Act of 1980. It disbanded the regulation-prone ICC and set up a Surface Transportation Board (STB) to monitor competition and the effect of competitive rates on consumers. The STB was intended to exert a much lighter degree of control than the ICC had. For decades, it has been successful with the intended light touch strategy that benefits both consumers and shippers.

Transportation prices fell by 4% in the first two years, 20% in five years and 44% in 10 years following deregulation. Railroads continue investing heavily in infrastructure, and that has produced greater levels of productivity. In the nearly 40 years since economic deregulation, railroads have invested more than $630 billion, including more than $100 billion the past four years. Railroads’ infrastructure and innovation support their competitive posture against other surface transportation modes, mainly trucking, encouraging cost efficiencies to spread into those other modes. Despite cutting costs to boost productivity, the train accident rate has fallen by about 80 percent since 1980 and 45 percent since 2000.

Today, US Railroads run a successful freight transportation system for shippers and consumers. Their networks exhibit fair prices, efficiency, strong competition against other surface transport modes, and an impressive safety record. Unlike some critical infrastructures, private railroads have an enviable record of investments and keeping maintenance current.

While for three decades since regulator reforms took place and the success story that followed for investors, shippers and consumers, STB has recently been reverting to ICC tendencies of unjustified regulations. There are no excess profits, no lSack of competition, no failing safety record, and no harm to consumers that justifies the STB’s current rush to socialize each railroad’s use of other railroads’ assets, without any guarantee of recovering the costs this “reciprocal switching regulation” imposes.

This isn’t the first time of such ill-considered regulatory activism 20 years ago. Then the Federal Communications Commission (FCC) launched its scheme that forced broadband incumbents to lease the high value parts (unbundled network elements) of their network to competitors at prices below cost. Surely, it is no surprise that to limit their financial losses, incumbent broadband companies cut back on investments. That reaction was predictable, yet precisely the opposite of what the FCC claims it expected.

These rules that required companies to subsidize their competitors led to a sharp reduction in investment, which only reduced competition and harmed consumer benefits. That facts on this are well established – when these regulations were removed, telecommunications-based broadband services soared, competition increased and consumers benefited.

Unfortunately for rail, without empirical justification, the STB is now considering a return to the dark days of the ICC when it regulated the transport rates for certain commodities and created a system of cross-subsidies. It is hard to imagine this is a serious proposal, but it is. This time, the STB is considering the implementation of reciprocal switching regulations that may require rail operators to serve its competitors at rates below cost, even if this causes gross network inefficiencies and congestion.

To those of us who watch specific regulators vacillate between sensible pro-consumer regulations and ugly displays of arrogant power, like this, the STB looks like another agency that has temporarily lost its way. The timing is wrong for wielding a big stick and socializing a private industry’s assets. The historical consumer benefits from rail reforms were so overwhelming, it inconceivable why the STB would reduce these consumer benefits.

The STB can learn from today’s mellower FCC. When an industry exhibits competition, makes massive investments, shows reasonable prices, earns modest returns on its investments, and performs a useful and productive function for society, there is no justification for riding a regulatory high horse.

Alan Daley writes for the American Consume Institute, a nonprofit educational and research organization. For more information about the Institute, visit http://www.theamericanconsumer.org.

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Alan Daley